Licking their wounds no more

<i>NYC hotel industry rebounds stronger and faster than many expected</i>

A year and a half ago, the New York City hotel industry was hurting badly, as tourists cut back on spending and business travelers stopped calling to book rooms.

But times have changed. Indeed, the industry, while not back to where it was at the market’s peak, has done a 180 and is now rebounding stronger and faster than most had expected.

This month, The Real Deal talked to hotel experts not only about the key metrics for evaluating hotel performance, but also about development, hotel sales and a host of other crucial industry markers.

Most said that while financing for new hotel construction is still difficult, the availability of debt has grown significantly in the last six months. And they noted that the speedier-than-expected recovery has prompted more hotels to change hands.

Analysts said that despite the new hotel rooms being built now (most are leftover construction from before the downturn), they are not worried about an oversupply — at least for Manhattan. That’s partly a result of Manhattan’s “huge demand cushion.” In the past, guests who wanted to stay there often opted for another borough or for the nearby suburbs. Now, with room rates still down from the market high, those guests are coming back to Manhattan.

But the fragility of the recovery is not lost even on the optimists, who note that another economic dip could impinge on the recent gains. And one source predicted that the strong room rate increases will be hard to keep in place during this first quarter, the slowest time of the year.

For more on hotel profitability, construction and which guests are holding up the market, we turn to our panel of experts.

 


Bradley Burwell
Bradley Burwell
senior associate, capital markets group — hotels, CB Richard Ellis

 

After a very difficult 2009, the New York hotel industry seems to have bounced back recently. What are you seeing in the overall New York hotel market?

New York is showing that it is the strongest lodging market in North America with an 82 percent occupancy rate, nearly 17 points higher than the nation.

 

Revenue per room, or RevPAR, was down substantially during the downturn. What are you seeing on the RevPAR front in New York City now?

RevPAR grew nearly 15 percent in 2010. New York’s RevPAR is about $185, while Manhattan’s RevPAR is just over $200. [That rate] can — and will — continue to climb at a voracious pace in 2011.

 

What else are you seeing in terms of occupancy in New York?

Occupancy is not moving too much. The city runs at 80 percent-plus and Manhattan runs at 85 percent-plus on occupancy. On average, Sunday may be the only day in Manhattan that is below 80 percent occupancy, and January and February are the only months that are below 80 percent.

 

Which sector of the hotel industry is doing best (luxury, economy or mid-range)?

From a pure growth perspective, the limited, focused service and mid-priced hotels are doing the best. They [had] about 20 percent growth in 2010. That was due to a couple of things. First, we saw the most supply growth in this sector in 2009. … Second, their rates are the easiest to push since they are still below $200.

 

What are the most surprising and positive trends in the New York City hotel market right now?

How the capital markets are really opening for large deals. Balance sheet lenders are willing to underwrite challenging deals, [and] while the CMBS market is not gushing, [it’s] definitely open to hotels. … In 2009 transaction activity fell about 80 percent; there was $420 million in hotels sold. In 2010 activity nearly quadrupled. There was about $1.5 billion of hotel transactions, and we’ll probably see over $2 billion in 2011, which will be near the 2007 peak.

 

What’s the outlook for the pipeline of new hotel development in New York?

Development is going to come back strong in the next 18 to 36 months. Construction debt is still a bit difficult to originate, so only tenured, successful developers with a good plan will get their deals off the ground initially.

 

What are the most exciting new hotel projects that you’re keeping an eye on in New York City this year?

I’m looking forward to the Mondrian Soho opening [this month], since it’s a few blocks from where I live. I’m also looking forward to seeing the Hyatt [on 48th Street and Lexington Avenue]. And I think the InterContinental Times Square will have a great, positive impact on the market. It is the largest hotel that’s entered the market in five-plus years, and can accommodate larger blocks of rooms.

 

Which geographic areas of the city are doing best and worst for hotels?

Not surprisingly, Midtown is the strongest. Lower Manhattan is probably growing at the slowest pace. However, with the W Downtown, Trump, the James, Andaz and others all recently opening, it has a lot of opportunity for growth, especially in the luxury sector.

 


Eric Lewis
Eric Lewis
executive managing director, hospitality & gaming group, Cushman & Wakefield

 

With so many new hotels coming online, are you concerned about hotel supply?

New supply is always something to keep your eye on. However, New York is somewhat unique in that Manhattan displaces a huge amount of demand. That displaced demand is largely responsible for the development of hotels in what we consider “overflow” markets to the east, west and north of Manhattan. We feel, therefore, that Manhattan, more so than any other U.S. market, has a huge demand cushion. The other unique dynamic is the removal of hotels from the Manhattan market. During the residential condo craze, viable, well-performing hotels were actually closed down in favor of residential conversion. That hasn’t happened in a while, given the relative softness in the residential market. However, going forward, some significant, older hotels occupying large sites will likely be demolished to make way for office development.

 

Is hotel financing getting easier?

The availability of debt for hotel product has grown exponentially over the past six to 12 months. The opportunity is particularly evident in the hotel sector, where NOIs [or Net Operating Incomes] are at very low levels compared to history and expectations.

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What are some exciting new hotel projects you’re keeping an eye on this year?

Perhaps the most interesting are Related’s Yotel on the West Side and BD Hotels’ new Pod Hotel. Both of these properties will offer smaller rooms for comparatively low rates, but in a hip environment.

 


Jeff Davis
Jeff Davis
executive vice president, Jones Lang LaSalle Hotels

 

What are you seeing in terms of RevPAR and occupancy in New York?

New York has sort of led the charge in the increase in RevPAR over the last couple of reporting periods. Occupancy is back to peak levels citywide — we are at about 87 percent. When occupancies are that high, you have the opportunity to rebuild rates. That’s what everyone is betting on and that’s why the market for transactions in New York has come back.

 

Which sector of the New York hotel industry is doing best?

Obviously the luxury segment probably took the biggest hit in the downturn and will probably lag in its recovery compared to the mid-scale and budget sector. But across the board we are seeing healthy increases in RevPAR.

 

Some have restarted stalled projects. What’s the outlook for hotel development in New York these days?

[New development] may come quicker than most people would have imagined. What is going to drive that is the availability of vacant land and the adjustment in the cost to acquire vacant land, coupled with the decrease in construction cost. That should help drive potential new hotel development, assuming we stay in a sustained recovery mode here in New York.

 


John Fox
John Fox
senior vice president, Colliers PKF Consulting USA

 

What are you seeing in terms of occupancy, and why do you think it’s recovered faster than predicted?

Several factors combined to drive occupancies up faster than anticipated. The value of the dollar helped a lot. And that has a two-pronged impact. Most people think of increased travel from overseas when the dollar is cheap. That’s true, but it also has the impact of keeping some U.S. travelers in the U.S. … In addition, a lot of the added new rooms that have opened over the past two years have been in the economy and moderately priced sector. That has made New York more affordable.

 

Some hotels held rates steady last year even though they risked driving away visitors. Was that a smart strategy?

At a macro level, significant rate cutting does little to generate new demand. However, it is very tough for a general manager to hold the line when his competitor across the street drops prices by 40 percent. So I guess I would say that overall it’s foolish, but it’s probably unavoidable.

 

What trend in the New York City hotel industry concerns you most right now?

The fragility of the economic recovery. I think keeping the strong room rate increases in place will be a challenge, particularly in the first quarter of the year, which is typically the slowest period for New York hotels.

 

Are you concerned about hotel supply?

I am not concerned about the supply change issues. If one looks back, we increased the supply of rooms in Manhattan alone from 2007 to 2010 by nearly 20 percent, and at the same time maintained occupancies at or close to their record 2007 level. That is a strong indicator of the ability of New York to absorb those rooms.

 

Are most of the hotel deals you’re seeing in New York distressed projects?

Most of the distress for NYC hotels is over. … The deals out there now are not distress, but opportunistic, with sellers seeing such strong interest on the part of buyers that they’re able to bid up the pricing.

 

What are the most exciting new hotels that you’re keeping an eye on this year?

Exciting may be a bit of a stretch, but the most interesting is Extell on West 42nd Street opening a 600-plus-room, low-priced facility; as well as the development on 57th Street of a new luxury hotel — the first in Midtown since 9/11.

 

Which kinds of hotel guests are helping to hold up the industry most?

Throughout the recession, New York did a pretty good job of holding on to the tourist sector. It was the decline in business travel that hurt us most. Those travelers are now coming back. I think that will do the most to strengthen and maintain the recovery.

 


Jan Freitag
Jan Freitag
vice president, Smith Travel Research

 

What are you seeing in terms of numbers on the RevPAR front in New York?

RevPAR was down 26 percent for ’09. It’s now back up 14 percent. In the last 11 months, three months [saw] single-digit RevPAR growth, while the rest of the months had double-digit growth.

 

Some hotels held rates steady last year even though they risked driving away visitors. Was that smart or foolish?

Smart. It’s very hard to regain room rates once you’ve cut it because you are educating your customer to expect discounts. You are training your clients to look at the other venues for the best deal. … If you have a clear rate strategy and say, “We are who we are, we provide this value, the cost is X to produce it, if you want to enjoy our hotel you need to pay this and we will not discount a lot,” it sends a very clear signal into the marketplace. Then in the up market, which we are in right now, it makes it easier to increase your room rates.

 

Are you concerned about hotel supply?

We have 49 hotels under construction, with 6,200 rooms. On the luxury side there is one hotel under construction, the Park Hyatt. That is not supposed to open until July 2012. For all of 2011, there are no other luxury properties coming in. That bodes well for the existing hotels.

 

What are the new hotels that you’re keeping an eye on this year?

There are two Aloft properties [opening], one in Brooklyn and one in Harlem. Aloft is the Starwood brand; it’s a very well-connected, upscale property type, and going to Harlem shows a lot about the strength of the city, the strength of the boroughs and the foresight of the local developer. I’m not sure if it will have an impact on the industry, but I think that property in Harlem will have a signal effect on that [area].

 

Sean Hennessey
CEO, Lodging Investment Advisors

 

What are you seeing in the overall New York hotel market?

The industry has bounced back . … We expected that with occupancy high [again] and demand strong, hoteliers would start to ratchet up room prices in 2010. That began in March and started to gain steam, although the pace of the improvement in room rates started to moderate toward the end of the year, which really surprised us. I think [that was the result] of a combination of factors. There were continuing signs that the housing market was not recovering as well as thought, and economic problems in Europe kind of affected the broader corporate market. The year turned out well, in line with all our expectations, but we were expecting that at this point we would really be on a roll and 2011 would be a much better year. Now it’s starting to look like 2011 will be another good year, but won’t be the kind of growth year that we might have anticipated.

 

What are you seeing with occupancy?

We have recovered faster because hoteliers in New York were more aggressive than hoteliers in any other markets in lowering room rates. I think hoteliers felt the need to do that, to a certain extent, because going into the down cycle, New York hotel rooms were the priciest in the country. So to a certain extent it was a case of the bigger they come, the harder they fall.

 

Which sector of the New York City hotel industry is struggling most?

I care a lot less about the revenue side of the equation than the profitability side. On the profitability side, the hotels struggling the most are labor-intensive hotels — the full-service hotels that have the restaurants and the concierges and those amenities. While hotels have had strong reduction in revenues, generally they’ve had high occupancy, which means they have to be fully staffed. That creates a squeeze on profitability. But beyond that, the ones that are struggling most are the ones that refinanced most aggressively prior to the downturn, such that they had a high level of debt to support as their earnings were eroding.

 

What’s the most positive trend in the New York hotel market right now?

The strong recovery in corporate travel that occurred during the second half of 2010. The market had been surviving on tourists, particularly foreign tourists, but it is really the corporate traveler that provides a very steady base of midweek demand, as well as willingness to pay the premium for last-minute bookings. In my mind, their return is what’s driving the improvements in room rates.

 

What’s happening with distressed hotel projects in New York?

I have seen very few of them. We did see the Dubai Investment Group lose control of the W in Union Square, and they sold the Knickerbocker Hotel site in Times Square at a significant discount. We have seen very few properties sell in a distressed manner, in part because the nature of the market and the size of the assets we have are some of the financially strongest owners of hotels in the world, and they are able to withstand the downturn. For instance, earlier last year the New York Four Seasons was declared in default. It’s owned by the guy who developed Beanie Babies, who doesn’t have as much money as he once had, but he still has plenty of it, and the outstanding mortgage balance is relatively small compared to that. They were able to work out their differences. Similarly, the Gramercy Park Hotel was recapitalized. RFR Holdings was able to work that deal out, and it wasn’t as if it was put up for sale in a distressed manner.

 


Michael Pomera
Michael Pomeranc
co-owner, Thompson Hotels

 

What’s the most surprising trend in the New York hotel market right now?

All of a sudden there are international companies that are going to try to build four- to five-star products. This hasn’t been seen for many years and is a direct result of the capital markets. … Large hotel chains are planning to build, develop and open product that hasn’t been built since the 1970s. This particular segment will affect the larger hotels and larger hotel companies, which is a specific market in New York City. That pertains to the InterContinental and the Hiltons of the world that are opening up on 57th Street and Times Square.

 

Which kinds of business guests are helping to hold up the industry most?

The business travelers that we see in New York today are mostly individual business travelers, not group business. … The bulk has been individual business travelers, entrepreneurial types. The local salesman and his visits have become somewhat obsolete.