Elliot Spitzer is building a hospitality and retail project in Hudson Yards, and Richard Branson’s Virgin brand will soon be stamped on a towering hotel in NoMad. The independent, 52-room Audubon Hotel will soon debut on West 181st Street in Washington Heights, and no less than five national chain hotels are going up in the Financial District.
In Manhattan alone, there are 73 hotel projects in various stages, comprising more than 14,000 rooms. Factor in the multiple projects in the outer boroughs, and the city is well on its way to reaching a record number of hotel rooms over the next year.
But a stronger dollar, higher land and construction prices, shadow units from listing sites like Airbnb and the potential for oversupply all threaten to slow the industry’s mega-construction boom.
There are 56 hotel projects with 10,740 rooms under construction, according to a TRD review of data provided by hotel data tracking firm STR, with another 17 hotels comprising 3,284 rooms in the final plans of staging. The rooms of these 73 hotels will phase into the market over the next two years, with a new high of 110,000 rooms expected during 2016.
This influx comes despite significantly slowing growth for two key measures of hotel profitability in New York: average daily rates and revenue per available room. Both lost momentum last year compared to the previous four years, even as occupancy increased to an impressive 87 percent.
Still, many industry insiders, especially developers, remain optimistic about the long-term returns for hospitality development in New York, and are actively looking to expand their presence in the city.
“It will continue to remain strong,” said Philip Loria, who, with Sal LoDuca, president of the Broadway Plaza Hotel, is building the 90-room Artezen Hotel, with a restaurant and rooftop bar, on John Street in the Financial District. In FiDi alone, the Artezen is one of eight projects underway, in a market with at least 20 existing hotels. But Loria is confident about his prospects. “If you have a good business model with conservative debt, provide superior service and create brand loyalty and repeat business, you will do pretty well.”
Perfect storm for construction boom
The explosion of hotel construction isn’t just about record tourism in New York, although some might say that is reason enough. Last year, 56.4 million tourists visited the city, the most ever, and well ahead of the 55 million predicted. The number of visitors soared 23 percent since 2009, when the New York hotel industry suffered a 22.6 percent year-over-year decline in average daily rates, and 26.4 percent drop in RevPAR.
“Hotels respond faster to cycles than other asset classes, which is one reason driving the hotel boom,” said Matthew Baron, president of Simon Baron Development, which is building a 30-story, 250-room Tommie Hotel, part of a chain of “micro-hotels” with small rooms and communal spaces aimed at younger travelers, on East 31st Street in NoMad. “It was the most distressed asset during the downturn because it’s nightly. On the flip side, when the market rebounds, you can go from $100 a night to $300 overnight.”
Additionally, no new hotels were built during the recession, according to Marc Magazine, executive managing director at Savills Studley. Before that, during 2005 and 2006, many hotel rooms came off-line to become condos, he said. That helped set the stage for accelerated construction once the economy rebounded, Magazine said.
Developers have also been building more boutique hotels on smaller and cheaper mid-block sites with a faster turnaround time, said Mark VanStekelenburg, senior vice president and practice leader at CBRE Hotels PKF Consulting USA.
“They are able to get the permitting and the hotels out of the ground on a much shorter development time line,” he said. “That’s increased the ramp-up of supply.”
Where’s the money?
Despite the gangbusters pipeline, construction financing is still challenging, said VanStekelenburg. Many developers are building — using cash on hand or revolving credit — and flipping, or leveraging pre-existing relationships with lenders to get projects out of the ground. For luxury hotels with mixed-use, such as condotels and those with ground-floor retail, traditional financing is typically not involved. Instead, a developer will get a note on the non-hotel component, VanStekelenburg said.
Long-term loans on hotels — whether a 10-year CMBS loan or a loan through an insurance company — generally get written after the property reaches stabilization, with about a year or two’s worth of occupancy, ADR and RevPAR numbers, said Jerry Swartz, partner at HKS Capital.
“We did hear that Sam Chang got a three-year bridge loan at a low rate the day he opened the Holiday Inn Downtown,” Swartz said. “There are no hard-and-fast rules when it comes to hospitality, but it helps to have a good sponsor, a good [brand name] or a good management company if it’s a boutique.”
Tom Baker, corporate managing director at Savills Studley, said lending for existing hotels with in-place cash flows is still available, even as revenue growth in the New York hotel market has slowed.
“As we go forward, lenders will be very sensitive to changes in occupancy and will pay close attention to the supply-demand relationship,” said Baker. “If supply starts to outstrip demand, lenders may become cautious. But we don’t see that yet.”
Hotel headwinds
So far, there have been more than enough visitors to fill the hotel rooms. Last year, there was a record 32.4 million total hotel room nights. Occupancy rose to 87.1 percent, from 86.6 percent in 2013, the fifth consecutive year the rate has increased, according to hospitality consulting firm Lodging Advisors. Still, ADR edged up just 1.2 percent year-over-year and RevPAR rose a scant 1.8 percent in 2014, compared with 3.2 percent and 5.6 percent in 2013, respectively.
“Last year was just about the slowest rate of increase in the U.S.,” said Sean Hennessey, founder and president of Lodging Advisors.
He noted that rising land prices will also make development more difficult in coming years. “That is undercutting the financial feasibility of some new projects,” he said. “Whereas in the past, a developer didn’t have to do a lot of soul-searching before building a project, now it’s more challenging, given the changes in the fundamentals.”
Additionally, nontraditional hospitality services such as Airbnb and Couchsurfing are starting to hamper the ability of hotels to hike rates during certain peak times, such as New Year’s Eve and during the U.S. Open, said VanStekelenburg. During these events, Airbnb availabilities expand exponentially.
In the past, Airbnb “was too small to be on the radar screens, but now it has become a massive company,” he said. “It’s bigger than the Hyatt and most hotel companies, and we don’t know what the ramifications will be.”
There are also questions about the resiliency of international tourism (which represented more than one-fifth of New York City visitors last year) in the face of a stronger dollar. “A strong dollar hits gateway cities more drastically and New York City is at the forefront of that,” VanStekelenburg said.
A better exchange rate could also make New York less appealing for U.S. travelers than overseas, and reduce domestic visitor rates.
Enthusiasm persists
So far, Phil Keb, executive vice president of development at the Hong Kong-based Langham Hospitality Group, said that Langham Place on Fifth Avenue in Midtown hasn’t seen a reduction in demand. In fact, Langham, which has about 30 luxury properties worldwide, is interested in opening a second Manhattan location.
“The good news is we have seen no contraction in demand through December 2015,” he said. “Our European bookings through the summer have seen a slight increase year-over-year.”
Henry Kallan, president of Library Hotel Collection, which owns four boutique hotels in New York including its namesake on East 41st Street and the Hotel Giraffe on Park Avenue South, and caters to foreign travelers, saw a slowdown in January and February, with occupancy hitting 85 percent, versus a consistent 90 percent to 92 percent last year. That coincides with the January report from STR that showed a sharp decline in ADR and RevPAR and a decrease in occupancy. Kallan blamed the weather, which, while cold, didn’t bring as much snow as last winter, which stranded travelers in the city. Others pointed to the one-time bump from last year’s Super Bowl.
“But I can take 80 to 85 percent any month of the year,” Kallan said.
Developers also are buoyed by the recent eye-popping sales of the Waldorf-Astoria and Baccarat Hotel, which went for $1.36 million per key and more than $2 million per key, respectively, to Chinese investors.
“If another hotel goes for another crazy price,” Savills Studley’s Baker said, “that won’t do anything to discourage any developers.”