It’s a good time to be in hotels — so long as you’re not trying to book a room on short notice. The industry is at its strongest point in several years in New York City, as room rates climb and new construction continues amid increasing tourism. New hotel development is happening both inside and outside of Midtown Manhattan, the traditional hub of the industry in New York. Developable land remains scarce in Midtown, so new hotels can be found everywhere from the outer boroughs to the far West Side and Downtown. Most of these new hotels are smaller ones, with less than 300 rooms each, and they include chain hotels as well as higher-end boutique ones with fashionable amenities. Room rates are also moving, with 2006 expected to see an increase of as much as 15 percent over last year’s $232-a-night average rate. Occupancy won’t likely be a problem: The city expects as many as 43 million visitors this year, up from the 41 million that stayed in the Big Apple last year. The Real Deal talked to hoteliers, brokers, and other industry experts about these trends:
John Fox, senior vice president, PKF Consulting
What are your projections for room rate increases and occupancy this year?
I am as bullish now as I have ever been. We are coming off a record year in room rates and occupancy. In 2006, it will be tough to hit the record-high occupancy rates of nearly 86 percent for 2005. It will probably be a couple points below. Last year, room rates went up 16 percent in the city. We’re expecting 10 to 12 percent this year.
What’s the outlook for hotel development in Manhattan versus the outer boroughs?
There are a large number of smaller projects under development citywide. We may open nearly 3,000 rooms this year. Of those, 1,200 are outside Manhattan. In Manhattan, there will be 1,770 rooms opening in 2006 from a total of 14 projects. In terms of room count, it will be mostly on the West Side and Chelsea from 14th to 34th streets.
What are the highest and lowest hotel rates you are seeing?
The Four Seasons, Mandarin Oriental, and St. Regis are the highest in town. The lowest rates are small independents like the Milford Plaza and the Pennsylvania.
Cristyne Nicholas, president, NYC & Company
Who is driving hotel demand? What is the proportion between business travelers and tourists?
In 2005, New York City had 41 million visitors. Approximately 75 percent of travelers to New York are leisure visitors and 25 percent are business travelers. Both of these markets are expected to grow in 2006, with 43 million visitors expected. We are seeing a lot of smaller, boutique hotels in development, which tend to draw more leisure visitors than business travelers because they don’t have the capacity to hold large convention groups. However, there is strong demand from the business travel market for large hotels that can host meeting and convention groups. In 2004, around 40 percent of business travelers were convention delegates.
Where are the tourists coming from?
In 2005, there were approximately 35 million domestic visitors and six million international visitors. The international market is growing and is poised to surpass pre-September 11 levels in 2006 with more than seven million visitors. New York City’s strongest international visitor markets are the United Kingdom, Canada, Germany, Japan, Mexico, France, and Italy. We are seeing growth in some new markets including India, China, and Eastern Europe. The international market is important to New York City’s tourism economy because, although these travelers only make up 16 percent of the total visitors, they spend more and stay longer, contributing 45 percent of the total visitor spending.
Art Adler, managing director, Jones Lang LaSalle Hotels
Where is the hottest area for hotel development?
It’s more opportunistic because there is not a whole lot of land in Midtown. If there was a piece of land available on Lexington from 34th to 59th streets, that would be the most desirable since there is tourism and business activity there. But land is too expensive. There is more development outside of Midtown because that’s where the land is: the far West Side, close to Javits Center, in the Meatpacking District, Soho, and even north. People are looking at the Harlem area, like 125th and Lenox.
Nolan Hecht, director in hotel transactions group, Cushman & Wakefield
Where is the hottest area for hotel development?
Most of the hotel development in Manhattan from 2003 to 2005 has been smaller hotels under 300 rooms in secondary locations where residential developments either don’t pencil economically or are prohibited by zoning. As a result, the majority of new hotel supply has been smaller franchised properties such as Hampton Inns, Four Points by Sheraton, and Holiday Inn Express, or boutique hotels opening in the 20s, 30s, and 40s.
The next hot frontier for larger hotel development will be the West Side. Hoteliers envision Times Square extending west toward an expanded Javits Center. Numerous developers are looking at larger sites on Ninth and 10th avenues in the 40s. The financial successes of Tishman’s 860-room Westin Times Square and Forest City Ratner’s 500-room Hilton Times Square on 42nd Street and Eighth Avenue give great comfort to the next wave of developers looking to stretch west to Ninth and 10th avenues.
What new amenities are you seeing in hotels?
The big amenity push in 2004 and 2005 were flat-screen televisions and wireless Internet. The next wave might be workout rooms and spa rooms. The Westin Times Square has already implemented this strategy by having Westin Workout rooms, which have an in-room treadmill, and Westin Spa Rooms, with massage chairs, scented candles, and relaxation music. The early results have shown these rooms to be a great success, as guests want the privacy of working out and relaxing. These rooms are commanding at least a 20 percent rate premium of the standard guest room.
What are the major obstacles to hotel development right now?
The rise-up in construction prices is alarming and is probably the number one reason we don’t see a lot of shovels in the ground for hotel development. Construction costs have been rising at over 1 percent per month (or 12 percent annually). It’s hard to make hotel deals pencil when new construction costs for hotels is pricing out at $550 to $700 per square foot, not including the cost of the land.
What’s hotter — extended-stay or traditional hotel rooms?
I think you will see a wave of branded extended-stay hotels in Manhattan. Developer Harry Gross of G. Holdings Corp. recently opened the 357-room Residence Inn at Sixth Avenue in Midtown, which is the first arrival on the scene, but it won’t be the last. The hotel’s rooms are over 400 square feet per guest room, which is at least 100 square feet over a typical Manhattan room, and it comes with a small kitchenette area. This product will be a homerun, not only with traditional extended-stay guests, but also with families looking for a little extra space. The major corporate brands are aggressively pushing to get their extended stay product in Manhattan. I expect you will see a Hilton Homewood Suites, a Staybridge Suites by Intercontinental, and a Westin Extended Stay in Manhattan by 2008 or 2009.
Are there new players coming to the hotel market now?
When we brokered the sale of the Algonquin Hotel last year, we noticed a plethora of Spanish hotel companies and Irish investors looking to purchase. While the eventual buyer was an American firm, the overseas interest was as strong as it has been in several years.
What’s the outlook for hotel development in Manhattan as opposed to the outer boroughs?
Certainly, the past hotel successes of Hartz Mountain Industries, with its Doubletree Hotel in Jersey City, and Muss Development, with its Marriott Hotel in Brooklyn, have caused hoteliers to start exploring sites in the outer boroughs, where the price of entry is much lower. Hotels have been announced recently in Harlem and Park Slope. Hotels across the tunnel in Secaucus are posting strong results, Long Island is strong, and Westchester is strong. The strength of Manhattan fuels the outer boroughs. So it is only a natural progression for additional projects in Staten Island, the Bronx, Queens, and Brooklyn.
Henry Kallan, president, HK Hotels
Where are the tourists coming from?
All of our Manhattan hotels [Hotel Giraffe, Hotel Elysee, Casablanca Hotel, and the Library] have the majority of the demand coming from the U.S. and the United Kingdom. In many countries, it is still customary to book vacations through tour operators, so we do not see as many travelers at our hotels from Japan, Germany, Italy, Spain, or Brazil, for example, but as these countries begin to use the Internet for booking more and more we are slowly seeing our business from these areas developing. Even a person from the other side of the world who has never heard of us can read the reviews of past guests on a site like Tripadvisor.com and feel confident about booking with us. In the past, you needed a big-name brand to succeed, but, thanks to the Internet, a traveler can find a hotel that suits his or her personal style.
What are your projections for room rate increases this year?
Most of our hotels are showing increases in average rate of about $35 to $40 from last year’s figures. We were surprised that this February managed to exceed last February’s number, since last year so many people came out to see the Gates in Central Park.
What are the major obstacles to hotel development right now?
To purchase any potentially good location may cost $500 per buildable square foot. If you add that to another $400 to $500 per square foot to develop the hotel, it can be challenging to achieve the profits you want from your investment.
What are the highest and lowest hotel rates you are seeing?
I doubt you can find a decent and clean room in New York City for less than $150.
Mark Gordon, managing director of international lodging and leisure group, Sonnenblick-Goldman
What are your projections for room rate increases this year?
Given the supply-demand imbalance, room rates should continue to increase considerably for the foreseeable future. At some point, new full-service hotel rooms will likely be developed, which will likely have a limiting effect on future rate increases, but, given the high barriers to entry and the time it takes to develop a hotel, this is not likely to occur for three to five years.
What new amenities are you seeing in hotels?
Hotel owners are now focusing on providing the types of amenities that guests would have in their home, such as CD players, surround sound, flat-screen TV’s, wireless Internet, and more accessible outlets and plugs for iPods and laptops. They are also focusing on spas and health clubs versus simply having a small gym.
How do condo projects stack up against hotels? Are developers who were considering converting hotels to condos changing their mind?
The economics are changing considerably. In the old days — 2002 and 2003 — condo conversion of hotels was often the clear choice. Since 2004, the hotel economics have been improving and now the analysis is not as definitive. We have sold several hotels recently which remained as such, including the Paramount, the Park Central, the Crowne Plaza United Nations, and the Essex House. We are currently selling three hotels in New York and are getting strong interest from both residential and hotel investors.
What’s hotter — conversion or new construction?
Conversion can often be done on a more economically efficient basis; however, many of the logical conversion candidates have been converted from hotel to residential already. We are now seeing clients consider conversion of office buildings to hotels and others that are taking parts of residential projects and converting them to hotels, which illustrates how far the market has recovered.
What’s hotter — extended-stay or traditional hotel rooms?
The city has always been under-hoteled in the extended-stay category and it presents an interesting opportunity for investors.
Kirk Reed, manager of hospitality practice for New York, PricewaterhouseCoopers
Where is the hottest area for hotel development?
Development is increasingly occurring in Lower Manhattan and the outer boroughs, including Brooklyn and Queens. Traditionally, 70 percent of the city’s hotel rooms have been located in Manhattan between 34th Street and 96th Street, but, since 1999, one-third of all hotel rooms constructed have been below 34th Street and almost one-fourth have been in the outer boroughs. Overall, the conversion of hotels to residential use contributed to a net decrease in hotel room supply in 2004 and 2005, but the conversion trend appears to be slowing with the slowing of apartment price growth.
Who is driving hotel demand? What is the proportion between business travelers and tourists?
The current strength in New York’s hotel market is due to the recovery of business demand. Leisure travelers continued to visit New York during and following the 2001 recession, with the exception of international travelers, but business travel declined due to the slowdown on Wall Street and amid the general decline in business travel in the post-2001 environment. By mid-2004, some of these effects began to unwind and the result was a 9 percent increase in Manhattan room demand in 2004.
What are your projections for room rate increases this year?
We expect a 15 percent increase in Manhattan room rates in 2006, slightly below the 15.4 percent increase in 2005.
What are the highest and lowest hotel rates you are seeing?
The average room rate in Manhattan was $232 in 2005. There are hotels that average $100 or so per night, but these hotels are rare. The ultra-luxury hotels — the Four Seasons, the Mandarin Oriental, the Peninsula, and the St. Regis — average above $750 per night.
Jose Alvarez, senior vice president and head of hospitality division, Trammell Crow
What are your projections for room rate increases this year?
Room rates will likely increase 9 to 12 percent in 2006. Continued strength in the financial sectors, growing tourism, and minimally increasing supply will drive the increases. However, a majority of hotel rooms coming online in 2006 are not upper-upscale and luxury quality in prime locations. These lower-rated hotel rooms will keep average daily rates from climbing as high as 15 percent.
Where is the hottest area for hotel development?
There is a significant amount of development on the West Side for several reasons, including the relatively low cost of land compared to more affluent areas of Manhattan that have more commercial presence. There is also the anticipation that the high rate of residential and commercial development will continue in this area. Midtown West is still undergoing a kind of gentrification and is becoming a real alternative for more affluent residents and businesses to locate. The city’s rezoning of Hudson Yards and expansion of the Javits Center will create additional hotel demand.
What’s hotter — boutique or big hotels?
Boutique hotels will continue to reign in Manhattan as many of the big hotel brands are already represented here. Big hotel owners feel they do not always need a brand in the city due to the already high demand, as well as the cost to develop a large, newly built hotel.