Hotel executives may want to study up on past downturns to gain some insight into how New York City’s hotel industry is going to handle this one.
With an estimated 8,000 to 9,000 additional hotel rooms in the pipeline for 2009, just as the New York City economy enters the second year of the recession, industry observers are looking to the past for indications of how this new inventory will be absorbed.
The impact may be unprecedented, because this downturn is coming on the heels of the most successful period in New York City hotel history. New York City “has never added this many rooms before,” said John Fox, senior vice president of PKF Consulting. He noted that the last big expansion in supply was during 1996 to 2001, when Manhattan added an estimated 6,000 to 7,000 rooms, or about 10 percent to its inventory.
That left the borough with a total of about 210 hotels and 61,000 hotel rooms on the eve of Sept. 11, 2001, which resulted in a downturn that lasted more than a year.
The increase in hotel room inventory in the years leading up to the Sept. 11 attacks was one of the main reasons it took the industry until 2003 to fully recover, said Fox.
What makes the expected increase in hotel inventory an even more critical issue this time around is that the current downturn came as more of a surprise for the hotel industry than in 2001, said Bill Carroll, senior lecturer at Cornell University’s Institute of Hospitality.
Pre-Sept. 11, there had already been a recessionary period, said Carroll, who noted that this gave the industry time to put the brakes on certain expansion plans. This time, however, signs of the downturn are coming too late for many hoteliers to shift gears. “If you have stuff in the hotel pipeline, you cannot stop it,” Carroll said.
As a result, there are projects coming online “in spite of the fact that there is negative demand.”
The New York City hotel industry has been through tough times before. During the recessions of the early ’70s and the early ’90s, Manhattan hotel room occupancy rates fell to percentages in the mid to upper 60s, significantly below the 40-year average of 76 percent.
Post-Sept. 11, however, proved to be the perfect storm of events. Occupancy rates dropped 10 percent from a high of 84 percent in 2000 to 74 percent in 2001, and stagnated at 76 percent from 2002 through 2003. Meanwhile, hoteliers panicked and started offering steep discounts through what were at the time relatively new reservation Web sites, such as Expedia.com and Hotels.com.
According to PKF Consulting, the rates Manhattan hotels charged for rooms plunged approximately 20 percent post-Sept. 11 and did not fully recover until 2003.
“The industry learned a valuable lesson after the last downturn post-Sept. 11, when the conventional wisdom was to discount rates,” said Carroll, noting that discounting rates led to a deflationary spiral for the hotel industry, which depressed profits. “And that still may happen in some segments of the market,” he said, “but at least at this point, at the high end of the product scale, rates are holding, and operators are getting more creative around their pricing and their ability to add value to a guest’s stay.”
While there has been much discussion about the role that New York City’s lower crime rate played during the city’s real estate boom, Fox from PKF Consulting noted that it is hard to quantify how safer streets contributed to tourism during the past eight years, when total visits increased from 36.2 million in 2000 to 46.3 million in 2007.
“It is very difficult to isolate a specific factor,” said Fox. “Clearly, the decrease in crime in the late 1990s helped a lot,” he said, but the improvement in the local and national economies also boosted tourism. And there were several special events that enticed visitors to New York, such as the UN’s 50th anniversary and the Pope’s visit.
Experts point out that during past downturns, the hotel industry lacked today’s highly sophisticated computer programs, which allow it to better track hotel guest patterns.
“The industry is much better prepared in terms of its technology — through yield-management tools they can literally turn room rates off and on within an hour, whereas they didn’t have that technology six or seven years ago,” said Scott Berman, a principal in the Hospitality & Leisure Consulting Group at Pricewaterhouse Coopers.
Still, yield management can only go so far. “At the time of Black Monday [in 1987] and Sept. 11 you didn’t have sophisticated yield management — instead you had inventory that was given en masse to the online travel agencies,” said Carroll. “Now you can be careful about discounting only as much as you have to discount — but still that is not going to save the world. If your occupancy drops by 8 percent, that is a hit, and you cannot make it up.”