Hotel location becomes key

<span style="font-style: italic;">Experts say only hotels in prime neighborhoods likely to get built</span>

Before the economy collapsed last September, hotel developers rushed to do deals in almost any Manhattan neighborhood, from the Financial District to the Lower East Side to the far West Side, trying to cash in on the surging demand for rooms.

Now, as the local market suffers a double squeeze of plunging occupancy levels and thousands of additional rooms coming online, hoteliers and developers are facing the brutal reality that neighborhoods still matter a great deal in the Manhattan hotel business. It’s becoming clearer by the moment that not all submarkets in Manhattan, which contains 83 percent of the city’s hotel supply, were created equal.

“Many investors look at New York as an aggregate market … but I think that’s misleading,” said Mark Gordon, executive vice president, principal and head of the U.S. hotel group at Cushman & Wakefield Sonnenblick Goldman. “When customers come to New York, the vast majority of them want to stay in what I consider traditional locations.”

Traditional hotel locations are in Central Manhattan, often near a high concentration of offices. Times Square, which has been reinvented in the last 15 years as a thriving commercial and tourist district, has of course emerged as a solid hotel market.

By contrast, newer hotel districts include the Financial District and the Lower East Side, where residential condo booms helped spawn hotel booms in recent years.

Though demand for hotels throughout Manhattan has fallen, experts expect more established districts to fare better than the newer areas. According to John Fox, senior vice president at PKF Consulting, Midtown East logged a 13 percent drop in occupancy in the first quarter of 2009 compared to the year-ago quarter, while Downtown suffered an 18 percent drop in occupancy.

“Generally in times that are hard, people are more inclined to gravitate towards more central locations in Midtown that everybody knows,” said Jeff Davis, executive vice president at Jones Lang LaSalle Hotels. “Fringe neighborhoods tend to be under more pressure: Lower East Side, Financial District.”

Even with 10,000 rooms on hold in the city because developers can’t get construction loans in the frozen credit climate, hotels are debuting this year and next, intensifying the competition in certain neighborhoods. The first-quarter 2009 market overview by HVS Consulting and Valuation detailing reduced expectations for projected openings in the next three years showed both Lower Manhattan and Midtown West will face gluts of new rooms. Forty-five percent of new hotels will be Downtown and 48 percent in Midtown West, with just 2 percent Uptown and 5 percent in Midtown East.

Fox pointed out that Eighth Avenue is considered the dividing line between Midtown West and Times Square. New hotels are concentrated in the area from 32nd to 42nd Street, west of Eighth Avenue, an area he distinguished from the traditional Times Square corridor of Broadway and Seventh Avenue from 42nd Street to the low 50s.

“We’ll see the differentials more pronounced this year as more and more properties open,” said PKF’s Fox.

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Pioneered two years ago by developer Sam Chang in 2007, the Midtown West area recently gained over 500 rooms with the debut of a Four Points by Sheraton at 326 West 40th Street, a Comfort Inn at 305 West 39th Street and a Fairfield Inn New York Manhattan/Times Square South at 330 West 40th Street. Hundreds more are on the way.

The Financial District, which welcomed the Marriott Marquis in 1985 as the first new hotel in the area since the 1960s, stands as a test case for the risks of rushing into a rising hotel district.

Though the area suffered after Sept. 11, and the Marriott was destroyed as a result of the terrorist attacks, Wall Street’s rise over the last decade as the major economic engine of New York spawned a residential and tourist district. With just nine hotels and 2,200 rooms in 2007, Lower Manhattan seemed ripe for development, and nearly every big hotel player, from McSam to Lam Group, wanted in.

In a PricewaterhouseCoopers 2008 survey of Manhattan lodging, 26 hotels were slated to open in Lower Manhattan in 2009 and 2010, with 32 more in the permit and early planning stages. (That compares with 18 openings in Midtown West, and 18 permits/planned projects.)

Wall Street’s crash knocked out the financiers needed to fund these Lower Manhattan hotels — and fill their rooms. More than a dozen high-profile Lower Manhattan projects, many clustered in the Financial District, are now on hold. Likewise, the seemingly endless expansion into every corner of Manhattan has slowed, dampening plans for the revitalization of the far western reaches of Midtown.

Hoteliers in these neighborhoods will likely react by slashing prices, experts said.

“I think you will see room rates Downtown significantly lower than they had been, and Midtown West will also be a lot lower,” said Fox of PKF.

Activity Downtown has not completely halted. A spokeswoman for the W Downtown on Washington Street said it was slated for 2010. What’s more, a hotel and residential building will reportedly occupy 5 World Trade Center, as originally planned, rather than an office for JPMorgan Chase.

But with delays and defaults becoming the new rule, once the credit markets finally thaw, projects in better-established neighborhoods may emerge as most-likely-to-be-built. Gary Barnett, president of Extell, is one of the developers putting Lower Manhattan on the back burner in favor of 57th Street and Times Square, areas with long track records of filling hotel rooms.

“In times like this, only the prime of the prime of the prime of the prime has a chance of getting built,” said Barnett.