With New York tourism steadily growing, the hotel industry is experiencing an economic boom as supply decreases and demand soars. Room rates are up, and new hotels are opening in a flood of activity eons away from those struggling post-September 11 months when tourists stayed away and the city’s hotels echoed with vacancy.
Hotel development, in fact, will be a big trend this year in New York real estate, as developers seek to cash in on high room rates. The development will include conversion of existing space into hotels as well as a slowdown in the conversion of hotels to condos, a big trend in 2005. The Real Deal has compiled a detailed list of new hotel projects in the pipeline .
“Demand is up and supply way down for hotel rooms,” says Dean Shapiro, executive managing director of brokerage CB Richard Ellis, “and, therefore, values are up.”
Jeff Gural, chairman of Newmark, says hotel development could steal some of the thunder from the extremely active condo development market. “We may see more hotels being built or properties converted to hotels, rather than condos or rental housing,” he told The Real Deal as part of his predictions for 2006.
A recent report by PKF Consulting, which specializes in hotels, showed that the average daily room rate in Manhattan as of October 2005 was $280.63, up from $222.91 only a year ago. Occupancy, too, was up at the tail end of last year: The city was expected to have closed 2005 with an occupancy rate of 87 percent and 22 million nights booked, an increase of one million over 2004, according to NYC & Company, the tourism wing of the city government.
Other figures demonstrate the popularity of the upscale market, specifically. The greatest price jump calculated in the PKF report was in the highest price bracket, above $300 per night, which jumped 29 percent; the cheapest rooms, under $140 per night, went up 18 percent. The biggest change in price by geography occurred below 42nd Street, with average rooms costing 28 percent more by October than a year ago.
While upscale hotels like the new Night on West 45th Street (suites there top $2,500 nightly; see story), the planned Andr Balazs-backed Standard on Little 12th Street, and existing quasi-brand names like the Mercer and the Waldorf Astoria are seeing renewed interest, mid-priced ones, too, are striking a busy note in the city. Four Marriott Courtyards, for instance, opened or were planned in Manhattan in 2005, and two Holiday Inn Expresses. Other chain hotels planned last year included a Hilton Garden Inn in Tribeca, a Comfort Inn in Midtown, and a Howard Johnson on West 36th Street, according to John Fox, senior vice president at PKF.
These figures suggest a consumer, tourist or not, is willing to spend increasing amounts for the most expensive hotels, and a general movement toward hotels Downtown. Some of the hottest neighborhoods for hotel construction include the recently rezoned far West Side near Times Square, Soho, and the Lower East Side.
And the fresh hotels aren’t limited to Manhattan. Nearly one-fifth of the estimated 5,000 hotel rooms that the city will add to its current inventory of 70,723 by the end of 2007 will be in the outer boroughs, according to a November report from NYC & Company. These include the planned Thor Tower in downtown Brooklyn and an unnamed hotel planned on Union Street in Flushing, Queens.
Nearly 40 million people – roughly five times the city’s population – visited New York in 2004, according to NYC & Company. When the 2005 statistics are crunched, that number may very well be eclipsed, and the hotel industry will have been one of the biggest beneficiaries.
And from the Plaza Hotel to the flashy Hotel on Rivington, which contains some residential space, the line between condos and hotels have been blurred by partial conversions, even if 2006 may be more about straight-up hotel projects.
“The hotel market is hot, it’s energetic,” says Jon McMillan, director of planning at Rockrose Development. “There’s a synergy between hotels and residences.”
Those familiar with the market say that residential buildings typically make more money than hotels. “One reason mixed-use projects are becoming more standard is that the payback of the residential helps support the greater cost of the hotel,” says Fox. The natural question, then, is why build hotels at all?
In addition to obviously higher room rates, “some people are just more comfortable with and want to do hotels regardless of the relative financial gain,” Fox says.
Another explanation can be found in zoning. An advantage of mixed developments is they allow greater build-up for a developer planning a residential building.
“Because you can never exceed a [Floor to Area Ratio] of 12 for a residential project,” McMillan says, “but you can go to 15 to 18 for commercial, adding a hotel to the top of an otherwise residential building allows you to take full advantage of the allowable bulk.”
According to a statement from the Department of City Planning, although residences are allowed in most commercial districts, if a lot is exclusively manufacturing, new residential uses are not permitted. Hotels, however, are allowed in most commercial as well as light manufacturing districts.
With the predominant attitude toward commercial development being largely negative – as McMillan says, “Obviously you aren’t going to build an office building!” – hotels bridge the gap between profits of the former and classification of the latter.