By David Jones
While much of New York’s commercial real estate market has fallen victim to the global credit crisis, there appears to be continued investor interest in well-placed hotel assets, as foreign money and visitors continue to flow into the city.
New York City recently surpassed Orlando and Las Vegas as the nation’s leading destination in tourism spending, which analysts say will help drive total visitors and hotel rates to record levels in 2008.
Last year, the Manhattan occupancy rate rose 1.5 percentage points to a record 85.9 percent, based on a record average room rate of $298.81, a 13 percent gain from the prior year.
“New York has really become the market for hotel investment on a global basis,” said Mark Gordon, executive vice president and head of the U.S. hotel group at Cushman & Wakefield Sonnenblick Goldman. “As a result, there continues to be very strong interest in New York hotels, both for sale, and also, on the finance side.”
Gordon said his firm is currently advising or brokering at least a dozen deals in New York, including the sale of three major hotels in Manhattan.
Just last month, he closed an $80 million construction loan for a new extended-stay property on Lexington Avenue, which would be the first newly built hotel on the East Side in decades. Gordon declined to reveal the specific location.
Bridging the gulf
Experts say Middle Eastern investors are driving much of the latest interest in New York hotels, in part because they are looking for a relatively safe place to park the wealth that has been generated by the high price of oil. And despite the problems on Wall Street, New York is still credited with having a strong hotel sector compared to the rest of the market.
Gordon said his firm recently worked with a group from Abu Dhabi on a new hotel investment in New York and he is actively pursing deals for two properties that are Sharia-compliant (meaning they follow rules of Islamic law, which includes being alcohol-free), near Times Square. Both deals are expected to close by the fourth quarter of 2008.
Meanwhile, shares of Morgans Hotel Group Co., the boutique hotel chain founded by Ian Schrager, have been up recently on speculation that sovereign wealth funds from Dubai and Abu Dhabi have made acquisition offers for the chain.
The Times of London reported last month that Dubai-based Zabeel and Mubadala, an investment arm of the Abu Dhabi government, have both offered to buy Morgans for about $600 million, plus debt, which would value the deal at $1.4 billion.
In New York, the company was scheduled to reopen its flagship Morgans Hotel on Madison Avenue between 37th and 38th streets on Aug. 28. That hotel closed in May for a $9 million renovation.
Morgans is also planning to launch its new Mondrian Soho, which it is developing in an existing building on Lafayette Street, in 2009.
Meanwhile, Middle Eastern funds are also in the mix for one of the city’s biggest trophy assets, the Park Lane Hotel. In April, the estate of the late Leona Helmsley hired CB Richard Ellis to find a buyer.
The New York Sun reported recently that a second round of bidding was scheduled and that a deal for the trophy property could range between $800 million and $1 billion.
Jeff Dauray, senior vice president at CBRE, said the expectation of a Park Lane Hotel deal would be “very visible within the market,” but he declined to give any details on the talks.
“It’s fair to say there’s been a good deal of interest over the last six months from international funds that are looking to benefit from the currency arbitrage,” he said. “There’s certainly quite a bit of interest in the New York space, particularly for trophy assets.”
Part of the reason Middle Eastern investors are so involved is that the high cost of capital is preventing many deals from being consummated.
For the first half of 2008, only eight properties, valued at $383 million, were sold in Manhattan, according to Real Capital Analytics, a New York-based research company. This compares with 25 properties, valued at more than $4 billion, in 2007.
Lenders are currently unwilling to finance more than 60 to 65 percent of most hotel deals in this market, and Middle East investors are among the few players with enough cash to satisfy the capital markets.
“Certainly the global network is at play,” said Scott Berman, U.S. advisory leader for hospitality and leisure at PricewaterhouseCoopers. “There’s no question that the sovereign funds that are based in the Middle East are more active.”
Jonathan Bloomberg, executive vice president at CRG Capital, said the number of transactions are down overall in New York because sellers are not willing to reduce prices and lenders are being very cautious about who they do
business with. “You no longer are seeing individuals jump into the game because they can scrape a little money together or because it’s a hot market,” said Bloomberg.
He said in the current market, lenders are only offering 50 to 65 percent loan to value for construction projects and they are requiring recourse in their deals, which often means personal guarantees are being asked of the sponsor.
In a recent report, New York-based HVS Global Hospitality Services noted that several proposed projects would be delayed because of the credit crunch. HVS said the delays in new projects will boost demand and rates for existing hotels.
While overall occupancy percentages are predicted to slip 1 percentage point to 84.4 percent this year, HVS said average room rates are expected to rise 10 percent to $326.73. It said revenue per available room should rise 8.9 percent to $275.87.
“While there are some signs of softness relative to the rest of the [hotel] industry, the metrics we analyze relative to New York are still healthy and impressive,” Berman said.
While overseas funds are leading the charge when it comes to interest in New York hotels, there is still considerable interest from U.S. investors to acquire and develop new properties in the area.
Philadelphia-based Hersha Hospitality Trust, for instance, is actively scouting the city for boutique hotel development and investment opportunities.
“We’re still very bullish on New York,” said Ashish Parikh, chief finance officer at Hersha. “We feel the supply-demand imbalance is going to continue over the next several years.”
The firm has $250 million invested in eight New York hotels and has another $65 million in mezzanine financing on local properties. After buying the 45-room Duane Street Hotel in January for $24.75 million, Hersha bought the Sheraton JFK Airport in June for about $34 million.
In July, Hersha opened the Nu Hotel at 85 Smith Street, the first boutique property in Downtown Brooklyn. Night rates start at $200 per room. The company also bought a stake in the 93-room mixed-used property in January for $17.24 million and invested another $6 million to upgrade it.
During the second quarter, Hersha reported 14 percent same-hotel growth in revenue per available room at its hotel properties.
Then there are the pessimists, who warn that despite the eager shoppers, hotel deals might not regain their 2007 pace.
Herrick, Feinstein attorney Paul Shapses warns that the outlook for major hotel deals in the current market will remain gloomy for the foreseeable future.
“I can’t say there is a pervasive movement toward buying hotels anywhere,” said Shapses. “It’s very difficult to see where there is true light at the end of the tunnel right now.”
“More owners of hotel properties have resigned themselves to take advantage of this great operating environment right now,” added Dan Fasulo, managing director of Real Capital Analytics. “Why fight the market right now when the fundamentals are so strong?”