The city’s hotel market, which moves to different rhythms than the residential or commercial markets, is riding toward the end of 2006 almost as steadily as it did toward the end of the record-breaking year of 2005. With double-digit growth in room rates, occupancy in the mid-to-high 80s and a growing profit margin, the hotel market looks to remain healthy for the next two to three years.
By the end of August (the most recent data available by press time), the year-to-date average room rate in Manhattan rose 11 percent, from $217 per room per night for 2005 to $241 for 2006, according to hotel advisory firm PKF Consulting. Occupancy edged down slightly, dropping 0.6 percent from 84.8 to 84.2 percent.
Year-to-date revenue per available room, or revpar, the hotel industry’s barometer for profitability, rose 10.3 percent by the end of August, from $184 in 2005 to $203 in 2006.
“Our expectation is that the rest of the year will be much of the same in that occupancies will be about even with last year and rates up in that range of 10 to 15 percent,” said John Fox, senior vice president of PKF Consulting.
“I’m seeing more and more new hotel development,” Fox added. “Right now, I’m working on four feasibility studies for new development — boutique, small limited-service, mid-level and full-service. [The industry] will probably add a couple thousand rooms over the next year or so.”
Gains in hotel stock, of course, follow the loss of thousands of rooms to recent residential condo conversions, though that trend is slowing.
“Right now, the hot sector is in boutique hotels,” said Mitchell Adelstein, president of CRG Realty, an adviser to hotel developers. He added that it’s particularly hard to build a large hotel in Midtown. “You’re really not seeing a lot of new developments in Midtown, just because land costs are so high that you can’t make enough profit with a large, full-service hotel to justify building the rooms.”
Last month, an investment firm owned by the ruling family of Dubai, Istithmar, bought the W New York Union Square hotel from the Related Companies and Starwood Hotels & Resorts Worldwide for $285 million, or around $1 million per room. That exceeds the per-room prices for landmark hotels like the Plaza and the Essex House, which each changed hands in the last two years.
Adelstein said the deal also worked out to around $1,000 per square foot. “There’s no higher revenue-producing asset per square foot than a well-functioning boutique hotel. You really don’t see office buildings selling for over $1,000 per square foot.”
Mark Gordon, head of the international lodging group at real estate investment bank Sonnenblick-Goldman, sees profitability across the board, not just in boutique hotels. He agreed with Adelstein that “it’s a great time to be a New York hotel owner. It’s also a great time to be a New York hotel investor because you’re buying into a rising market and the debt market is extremely supportive of New York City hotels. The lenders look at New York City hotels as great lending opportunities.”
Sonnenblick-Goldman has refinanced one Times Square hotel three times within the past 13 months, Gordon said. “This trend [of refinancing] is occurring on a national basis, but it is much more extreme in New York,” he said. “Revenue and average daily rate continue to increase at a rate that far outweighs operating costs.”
Gordon said international investors have their eye on the city, and that his firm was working on a deal last month to sell two hotels to an Irish investment fund. “We’re seeing the convergence of international capital aggressively pursuing New York hotels,” he said. “New York is really viewed as the best hotel market in the world at this point.”
Of course, markets are cyclical, and the boom times won’t last forever. Brokers and owners place the current market at the peak of a cycle that should last at least two more years, barring unforeseeable calamity such as natural disasters or terrorism.
“Is this market going to change? Yes,” said Fox. “But I think we’re a couple years out until it’s going to soften, and even then, the softening is going to take occupancies in the mid-80s to occupancies in the low-80s, which are still very healthy and profitable levels for New York hotels.”
Several brokers said that the city’s long-term efforts to promote development in the Hudson Yards area on the West Side of Manhattan, and more near-term projects like the expansion of the Javits Convention Center, will spur hotel development there.
In an encouraging development, outer-borough sites are showing up among the ranks of new projects and proposals. But even if the outer boroughs add 5,000 or 10,000 rooms in the coming years, Manhattan’s 65,000 rooms still dwarf their total, Fox said.