If it is your intention to be involved in New York City’s hospitality industry, you must have a positive attitude and conviction. As the president of a national chain of boutique hotels said to me, “You either have to be crazy, or be an optimist, since each day you start your business with no customers and hope by the end of the day, your rooms and restaurants are full.”
So it’s no surprise that in the wake of the worse economic crisis since the Great Depression, industry leaders who spoke to The Real Deal were cautiously optimistic on the state of the hospitality market in 2009.
Eric Lewis, the head of the global hospitality valuation services at Cushman & Wakefield, said that while the New York hotel market is facing a “perfect storm” of negative market forces, it’s important to keep two things in mind:
1. The market is coming down after an unprecedented run-up in revenue-per-room rates, which increased by roughly 86 percent from 2003 to 2007 and are now at
historic highs.
2. The New York market has proven remarkably resilient. Although it should be hit during this down cycle, there is every reason to expect it will return to health once the storm passes.
Mark Gordon, the executive vice president at Cushman & Wakefield Sonnenblick Goldman, said that while the fourth quarter was rough for the hospitality industry, things need to remain in perspective.
He said that since 1972, the hotel market has only had six years of negative revenue per room (or revpar).
Even with the economic challenges, he said, the average rate in the city through October was $307.29 with occupancy of 88.5 percent — the highest in the country by a considerable margin.
“New York City also has strong supply-and-demand economics,” Gordon added. “Since 2000, there were only three full-service and/or luxury hotels developed in Midtown: the Hilton Times Square in April 2000, the Westin Times Square in October 2002 and the Mandarin Oriental in December 2003 — aggregating 1,500 rooms. This is the total supply that was added in Midtown in the past eight years, a period of time in which 4,000 rooms were taken out of service, resulting in a net decrease in hotel rooms.
“No other city in the U.S. has this kind of dynamic,” he said.
Even so, the tide is turning. Sean Hennessey, president of Lodging Investment Advisors, said, “The Manhattan hotel market, which has shown exemplary strength in recent years, has begun to falter in the wake of the financial markets’ upheaval, which began in late summer.”
Hennessey said that through September, revenues for hotels in New York City were up about 8 percent compared to the same period in 2007. Following the collapse of Lehman Brothers, demand quickly deteriorated. As a result, citywide revenues per available hotel room fell about 10 percent in October and 20 percent in November; they were running slightly more than 20 percent down for the first few days of last month.
“Most hoteliers expect the 8 percent year-over-year revenue growth achieved for the first nine months of the year [to] completely evaporate by year-end,” Hennessey said in late December. “For 2009, the consensus view among local hotels is for hotel revenue per available room to decrease approximately 12 percent.”
He said the biggest concerns are:
• A less vibrant Wall Street hurts all
hotels. Demand from businesspeople who support Wall Street, such as lawyers and
accountants, is generally slackening.
• As other countries’ economies weaken, the demand that accrues to New York as a “world city” declines.
• The “AIG effect” is prompting hotels to hold meetings that might once have been held in New York in other locations, such as New Jersey and Connecticut, instead.
• Rising airfares have discouraged both international and domestic travel.
• The strengthening dollar discourages foreign tourism: For example, it is now about 30 percent more expensive for people to visit the U.S. from Europe than it was at the beginning of 2008.
• Low consumer confidence discourages spending on discretionary items, particularly trips to destinations considered extravagant. At present, New York City’s hotel room rates are by far the highest in the country.
• A spate of new hotel openings will likely put pressure on all hotels to offer discounts and promotions in an attempt to stimulate demand.
Taken together, it’s a gloomy short-term forecast. On Hennessey’s last point, however, one thing is certain: Fewer new hotels are expected to be built over the next 12 to 24 months.
Many hotel projects on the drawing board will be placed on temporary hold due to the lack of construction and permanent financing. Many of the more than 40 hotels that are in various stages of planning in Downtown Brooklyn, Long Island City and the Bronx will never be built.
Ed Lombardo, vice president at Pacific National Bank and one of the most active lenders for new hotel construction, said, “Construction financing for hotel development will be a challenge in 2009.
“The lender and equity investor will have to be able to project past the current negative environment in order to see a positive economic environment when the project is completed,” he said.
“A hotel deal starting in 2009 will not be completed until 2011, when the economy should be growing. Without economic growth, we do not have support for the hospitality industry.”
Lombardo said if an investor plans to start construction on a hotel, there will be many financial obstacles to combat to gain financing.
He said financing will be provided only to those who meet certain criteria: First, they must be financially strong and experienced hotel operators. Second, they must have hotel projects in long-established submarkets such as Midtown East and Times Square (forget all of those plans for the outer boroughs). Third, they must have well-managed, nationally recognized franchises with strong reservation systems. And, finally, they will be financed with a loan-to-cost of 50 to 60 percent, requiring an investor to put in a great deal of capital.
The president of W Financial, Gregg Winter, said financing hotels today is even more challenging than financing other new construction projects.
“As challenging as it is today to obtain construction financing for well-conceived multifamily rental or mixed-use projects, obtaining financing for new ground-up hotel projects is exponentially more challenging — something like trying to surf on a glacier,” he said.
“Only the strongest, most experienced and truly liquid hotel developers will have any chance of laying claim to one of 2009’s few hotel construction loans,” he noted.
“Even the savviest developers who do somehow manage to thread this needle and qualify for such financing must now expect some level of recourse,” Winter added.
“Prospective lenders will scour the developer’s balance sheet and pipeline of other projects to screen for any
signs of trouble, or potential trouble that may strain the developer’s finances during the construction and stabilization period.
“Clearly, the bar has been raised to unparalleled heights, and with good reason,” he said.
All told, 2009 will be a challenging year for the economy and the New York hospitality industry. Nevertheless, I
concur with Hennessey and Gordon when they say New York City will continue to be the global financial and leisure capital of the world, and it is still the most desired destination for many domestic and international travelers.
From both a performance and investor-demand perspective, New York will always be the strongest hotel market in the country.
Michael Stoler is a columnist for The Real Deal and host of real estate programs “The Stoler Report” on CUNY TV and “The Michael Stoler Real Estate Report” on 1010 WINS. He is a Director at Madison Realty Capital and an adjunct professor at the NYU Real Estate Institute.