Too many rooms built at the inn

Despite faster growth, NYC cushioned from U.S. glut

Hoteliers seem happy: Daily announcements about new projects offer grounds for rosy expectations in the hospitality industry.

Such optimism, however, is likely to result in a nationwide hotel glut this year as the large number of hotels slated to come online exceeds demand. And New York City is expected to see an even faster rate of growth than the nation as a whole in the number of hotel rooms built.

Nationwide, there were 4.4 million hotel rooms in 2006, a figure expected to grow 1.6 percent this year and 2.3 percent each year in 2008 and 2009.

In Manhattan, there were more than 57,800 hotel rooms in 2006, according to industry advisor PricewaterhouseCoopers. That number is expected to grow 5.3 percent this year, 8.7 percent next year and 2.9 percent in 2009.

Yet, New York’s numbers do not give many hotel professionals reason to be concerned, because New York is at a much higher occupancy rate — and price — than the rest of the country. Also, guests will be able to select from plenty of new hotels.

The surprising result: Despite the growth in supply of rooms, prices in Manhattan look like they will go up.

“The outlook for this year is for rates to go up another 12.6 percent,” said Bjorn Hanson, a principal at Pricewaterhouse-Coopers.

Daily room rates in New York City, and the country as a whole, were up this March compared to last.

In the New York City metro area, the average daily room rate was $221.57 as of March, and the national average was $102.71, according to Smith Travel Research.

But the addition of new rooms could cause New York’s high occupancy levels to decline a bit.

“Occupancy will decrease slightly, partly because of price resistance and partly because there will be more hotel rooms. So, we think occupancy will actually decrease by about two points,” Hanson said.

That would take occupancy down from 85.1 to 83.1 percent. Still, Hanson notes, it should be “another outstanding year.”

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Of the estimated 10,000 hotel rooms expected to come online in Manhattan by 2009, half are already close to or under construction, said John Fox, senior vice president and executive in charge of the New York office of PKF Consulting, which tracks the hotel industry. The rest are still on the drawing board.

In addition, Fox estimated that several thousand rooms will become available in the outer boroughs.

“It’s my belief that given the strength of the market, while that will lower overall occupancy somewhat, there’s still going to be levels that most cities would be very envious of,” Fox said. Escalating land costs, and to some degree construction expenditures, have constrained development. Had land been more affordable, Fox said, hotel rooms would jump to 15,000 from 10,000 this year.

Barring unforeseen conditions, some hospitality experts forecast that New York City’s occupancy rate will decline further in the near future, but Fox doubts it would drop below 80 percent. Even if it dipped a few percentage points below 80 percent, it would still be above the average in the rest of the country.

Nationally, the occupancy rate is just 63 percent and expected to rise 0.2 percent this year. PricewaterhouseCoopers data also indicates a slight expected increase of 0.3 percent in 2008 and 0.2 percent in 2009.

“I think New York will soften in five or six years from now,” said Mike Cahill, president and founder of Hospitality Real Estate Counselors, a national lodging real estate advisory company. “But softening in New York City is not the same as softening in Dallas.”

Cahill noted that New York City’s hotel market does not resemble the landscape of a few years ago, when the city was losing a large number of hotels to condominium conversions.

“Now the shift has come back because of the strength of the hotel market,” he said.

Another industry specialist envisions a down cycle coming sooner.

Brian Tress, an executive director in Ernst & Young’s hospitality advisory practice, thinks New York City will remain in an “up cycle” through 2009. Revenues will be buoyed in the city — and nationally, he said — “by average room rate rather than occupancy.”

Also, while there may be an influx of hotel projects in Manhattan, it does not mean there is fat to share with other markets.

If hoteliers in the outer boroughs or beyond are expecting to poach some of Manhattan’s potential hotel business, they could have another thing coming.

“If those hotels are relying on overflow demand from the city, they may feel a more significant impact from additions to supply in Manhattan,” Tress said.

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