10,000 rooms on ice

<i>Finance woes delay or cancel scores of hotels</i>

Go to: A look at what’s holding up hotels planned for NYC

Financing trouble is drastically eliminating the number of hotels under construction in New York City, causing at least 10,000 formerly planned rooms to be stuck in the pipeline — or canceled altogether.

This month, The Real Deal consulted developers, hotel chains, public records, and other sources connected to hotels in the city’s pipeline and found at least 43 of them — with an aggregate of some 10,150 rooms — are delayed or completely axed.

The most common hurdle? Lack of financing.

The chill could last a couple of years, sources said. “Unless you have a shovel in the ground, I don’t think you should anticipate any hotels are going to be built for the next 18 to 24 months,” said Chris Kelly, managing director of real estate for Capital Source, which financed the Mondrian Soho and five other New York hotels.

“There’s been a movement by the remaining active lenders to focus on existing properties with existing income streams,” Kelly said. “That means no new development.”

Many developers interviewed insisted that the city is underserved by hotels, and claimed that they would press forward once the credit market opens up. But industry experts predicted that even some of the most established developers could lose their land to foreclosure before the economy turns around.

Alan Miller, a senior director for Eastern Consolidated, said, “If [developers] don’t have their construction financing right now it’s considered underwater, [meaning] the amount of the loan that they have is more than what the land is worth today.”

During the boom years, Miller said, “We did 30 of those deals and sold mid-block sites to first-time developers who not only never built a hotel before, but they never built a building before … They’re going to get foreclosed on the land.”

Of the 43 properties The Real Deal found that were canceled or on hold, at least six are in some stage of foreclosure. They include Kimpton Hotel and Residences’ Vu Hotel near the Manhattan Cruise Ship Terminal, which a spokeswoman said has hired its management staff but can’t open until new ownership takes over, and the 300-room Cambria Suites that PLC Partners planned in Downtown Brooklyn, which hasn’t started construction.

PLC Partners, which could not be reached for comment, has another Cambria Suites planned on property near Madison Square Garden, where construction has been inactive since a historic church was razed on the site.

A source close to the project said the developer paid too much for the land, $424 per buildable square foot, and would probably be unable to get a construction loan.

Room for more?

With 78,450 rooms, New York City ranks sixth nationally in available accommodations, and it is traditionally the most profitable market in the country, according to Lodging Econometrics, a research and consulting firm.

Average annual occupancy rates hover around 85 percent, although this year has seen historical lows, between 62.7 percent and 70.4 percent, according to NYC & Company, the city’s tourism division. (It should be noted that January and February are historically the slowest months in the business.)

Before this year, however, hotels were often turning people away and the shortage hurt the city’s economy. Estimates put visitor spending between $183 per day (for domestic tourists) to $418 (for foreign business travelers) — tens of billions of dollars in total.

While rates have already dipped to an average $198 in March 2009 from $288 in March 2008, thanks in part to the recession, a surfeit of rooms would likely cause lower room rates in the coming and busiest months.

That could be a boon to tourists that may have been priced out before. “You can never have too many hotels in Manhattan,” said Sam Chang, president of McSam Hotel Group.

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Chang is the city’s most prolific hotelier, known for drawing developers in his wake to once-overlooked markets like Gowanus and Long Island City, which he now considers over-saturated.

“I’m not going to buy any more new projects, but whatever I have now I’m going to try to finish them up,” said Chang. “I’m only 48, so before I die I will finish them.”

Of his 19 sites, six are on hold until financing is available. Chang said he would build his Comfort Inn in Sunset Park, Brooklyn, on 59th Street near the Brooklyn-Queens Expressway, with cash.

Waiting out the recession

Lenders and hoteliers are in conflict about when is a good time to start building.

Lenders are increasingly wary of unprofitable ventures in a rocky market. Kelly of Capital Source also noted that lenders aren’t certain New York needs more hotels anyway.

Hoteliers, on the other hand, are generally optimistic about the city’s long-term prospects, and would prefer to build during the bust so they can cut the ribbons as soon as the boom starts. In addition, hotels are expected to ride out recessions during their lifespan.

“The economic life of a hotel is generally 50 to 60 years,” said Sean Hennessey, CEO of Lodging Investment Advisors. “A lot of these projects are stalled not so much because of concerns over the current state of health over the industry; they are stalled because of the capital markets.”

Hennessey’s consulting firm advised on the hotel component of state projects like Brooklyn Bridge Park, the Javits Center and General Growth Properties’ South Street Seaport overhaul. He said the viability of those projects is still strong, although the 1,200-room Javits hotel was conceived before the recent explosion of hotels in the West 30s.

Eastern Consolidated lists 4,887 rooms newly completed or under construction in the area.

In addition, GGP could have a hard time getting the South Street Seaport project to move forward, since the company recently filed for bankruptcy.

Extell Development president Gary Barnett said he plans to proceed with foundation work on just two of the many sites he owns, despite lacking construction financing for either, so that he’ll be poised to build when money becomes available.

One of those projects is a 73-story tower designed by Costas Kondylis, which is set to include a five-star hotel and is planned near Carnegie Hall. “If we don’t get financing, we’ll protect the site and keep it until we do,” said Barnett.

“This is a project that’s going to take three or four years to complete,” he said, adding that he expects the economy will be different then. “We base ourselves on an assumption that things are going to come back to normal.’

Experts agree that the luxury market will likely have the toughest recovery. Hotels catering to business travelers in the financial industry, a segment that has diminished since the fall of Lehman Brothers, are particularly vulnerable now that displays of excess, especially among companies that received federal bailout money, are vilified.

For example, Goldman Sachs now requires visiting employees to stay at Embassy Suites instead of the Ritz-Carlton or Plaza Athénée, the Wall Street Journal reported.

“No one’s going to be going to a Four Seasons,’ said Kelly.

While he predicted there would always be demand for luxury hotels in New York, he added, “The financial sector is not going to be the driver of demand for that market, that’s a certainty.’