Two out-of-towners came to New York for a client dinner on December 8. After innumerable calls to Manhattan hotels, the frustrated duo called in the services of their investment banker, who finally got them a room (one room) at the Sheraton on Sixth Avenue – for $650.They were thrilled.

The constant drumbeat of New York hotels shutting their doors to make way for residential construction has to make you wonder whether tourists coming to New York won’t find themselves in the same boat (or room). According to John Fox, who does research on the hotel industry for a firm called PKF, the occupancy rate of New York hotels last year was about 86%,”unheard of for a major metropolitan market. Manhattan was virtually sold out for 250 nights.”

According to Mr. Fox, the rate at which hotels have been closing is unprecedented .This week alone it was announced that both the Mark Hotel and the Drake would be sold to groups planning to convert the properties to condominiums.That’s on top of other famous establishments, like the Plaza and the Stanhope, which announced similar plans last year. All told, not including this week’s victims, New York has lost 3,000 rooms through such closures in the past two years.

Meanwhile, demand for hotel rooms has increased steadily in recent years. The weak dollar is one reason. For many visitors from overseas, currency trends have made even $650 a night appear reasonable. At the same time, American travelers, put off by the high cost of visiting Europe, have stayed home, putting even more pressure on the domestic travel industry.

Also, the economy has been growing. Wall Street is busy churning out deals, meaning that business travel (about 25% of the total) has also picked up. Additionally, Mr. Fox points out that “the way we’re looked at has changed.” New York’s reputation as a fun and safe place to visit has brightened both in America and abroad.

The statistics bear this out. In the current year the city expects to host a record 7.2 million international visitors, up 7.5% from last year’s total. The former record was 6.8 million, recorded in 2000. The combination of the September 11 attacks and a sour economy drove the number down to 4.8 million in 2003.

Travelers from the other 49 states should rise 4.6% to 36 million this year. Interestingly, the number of domestic visitors has increased in each of the past five years, notwithstanding the impact of September 11.

The benefit to New Yorkers of having 41 million tourists running around our city, crowding our restaurants, snagging our cabs, blocking our view of the Van Gogh drawings, and otherwise being underfoot is huge (and we shouldn’t forget it). Tourism will contribute about $22 billion in revenues this year, generate $5.4 billion in taxes, and account for some 330,000 jobs in New York.Even so, most of us draw the line at putting them up in our spare bedroom, even if we had one.

So shouldn’t we be concerned about a hotel room crunch that could discourage travelers? The folks at NYC & Company,the official tourism group,s uggest there are enough hotel rooms coming that the recent closures will not make a great difference. The numbers, though, are not convincing.

There are currently about 70,000 hotel rooms in New York City (the two closings will remove almost 800 rooms from that number). In the pipeline are projects that will add about 5,000 rooms by the end of 2007, for an increase of 7%. However, since demand is growing at better than 5% a year, these additions are not likely to ease the market tightness.

A great number of new rooms will be located outside the traditional tourist meccas, such as a new 210-room Marriott property expected to open soon at 92nd Street and York Avenue (described as being “steps from Museum Mile”). There are new projects coming on in Queens, Flushing, TriBeCa, Brooklyn, and downtown, but precious few in Midtown.

Why are the hotel owners selling out? Because the price of residential real estate in Manhattan has soared. Notwithstanding some modest softening in the market recently, any other use of prime property pales in comparison.

Another factor encouraging hotel owners to sell may be that operating costs are going up, and may get worse as owners have to renegotiate their union contracts this coming July. With occupancies so high, there is concern that union demands will be aggressive.

Not that the hotels are suffering. Reflecting the strength of the business, rates have been moving up nicely.As of November, the average daily room rate was 20% higher than the level a year earlier. That’s a hefty hike – and one that could deter a few travelers who may find better value elsewhere.

What could change these trends? Most likely,a drop in residential property prices. According to Prudential Douglas Elliman’s just released Manhattan real estate survey, the price for condominium units sold in Manhattan in the fourth quarter was a record $1,112 a square foot, up 30% from the prior year.

While prices have continued to rise, so have inventories of condos on the market.At the end of the year, the number of units for sale was at the highest level recorded in the four years that the company has been measuring the data. At year-end there were a total of 2,553 newly built and resale condos on the market – up 65% from the prior year. That kind of overhang could cause prices to weaken.

Failing a softening condo market, it may be that the city will have to provide some tax incentives to encourage new hotel construction. Otherwise, there will truly be no room at the inn.

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