Hospitality Industry Soars as Dollar Drops
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

With the euro and the pound at record highs, visitors are flocking to New York City, making the hospitality industry one of the fastest-growing segments of the commercial real estate market.
Local and international investors are searching all areas of the city for sites to build hotels, and existing hotels are trading at record prices. According to information compiled by the brokerage CB Richard Ellis, at least 15,000 rooms are under development or in planning stages for more than 100 new hotels in the five boroughs, with the majority of rooms planned for Manhattan.
“The hospitality industry in New York is rolling toward setting new records for average daily rate and revenue per available room in 2007,” the senior managing director of the Hospitality & Gaming Group at CB Richard Ellis, Daniel Lesser, said.
According to Smith Travel Research, the average daily rate for New York City hotels through June 2007 was $268.82, up 12.2% over the same period in 2006. The revenue per available room was $225.49 for the same period, reflecting a 13.5% year-over-year increase. “Considering that these figures do not include New York City’s historical ‘busy season’ of September through mid-December, it is interesting to note that the city has already surpassed the $267 ADR for all of 2006,” Mr. Lesser said.
The executive vice president of the U.S. Hotel Group for Cushman & Wakefield Sonnenblick Goldman, Mark Gordon, said New York City “is in need of additional hotel rooms and many of the new hotels planed are very creative destination hotels. However, a considerable number of hotels will not get built as well, so investors should not get too caught up in the statistics. Given the demand for New York hotels on a global basis and the advancement of Internet-based marketing, boutique hotels will continue to be strong performers.”
Last year, the City Investment Fund and Morgan Stanley purchased the Crown Plaza in Times Square. The president of the City Investment Fund, Thomas Lydon, said: “It is our expectation that the hotel market will stay strong for the foreseeable future 12 to 24 months, especially if the dollar stays at the current levels versus most currencies. Well-located Midtown hotels should be able to increase room rates in the 5 to 10% range. The most vulnerable hotels are the mid-block hotels in non-prime areas that will see the immediate effect of any slowdown in business activity and tourism. Many thousands of rooms are being completed in 2008/2009 counting on 85% plus occupancy, and room rates, which are projected of the top of the market. These hotels will need to be permanently financed after construction with much more stringent underwriting requirements. This could lead to a number of situations where the equity requirements are greater than the sponsor’s resources, or very low returns are being earned from operations for several years.”
Last month, Thompson Hotels opened its newest hotel, the 100-room 6 Columbus, across from the Time Warner Center on West 58th Street. A principal at Thompson Hotels, Michael Pomeranc, said: “We have full confidence in the New York hospitality industry. We continue to seek out unique opportunities to create lifestyle hotels for our following reasons. Unique ‘neighborhoods’ require different types of hotels custom-tailored to suit New Yorkers and that local market. Our city is a collection of neighborhoods; some require meeting and conference spaces to supplement their program; some require other things such as vacation units and resort-type facilities, yet some require just a great sleep.
“It depends which neighborhood you analyze,” Mr. Pomeranc continued. “Responsible planning, analysis, and critique by experts will help regulate hotel growth in New York in a positive way. We are actively looking for opportunities. We get it.”
A principal of Troutbrook Companies, Marc Freud, said: “Slowly and then more rapidly over the past several years the high average daily rate of hotels in Manhattan has created the opportunity for real estate developers and investors to focus their attention and resources on building hotels in what where considered secondary locales for this asset class. With an estimated 14,000 hotel rooms in the development pipeline in the coming years, one has to query when we start seeing compression on room rates, occupancy levels, and average daily rates.”
Mr. Freud said he does believe that in the coming several years the hospitality industry will see a leveling off of occupancy in the New York market and a decrease of maybe 2% to 3%. He also is quick to add that he does see a slight increase in ADR in both the upperpriced segment and lower-priced segments by no more than mid to high single percentage points.
Foreign investors are particularly interested in purchasing hospitality assets in New York. In July, the American subsidiary of the Statuto Group, a Milan-based company, closed on its purchase of the former Atlantic Bank building in the Herald Square area. The price of the 16-story, 99,000-square-foot building is $105 million, or $1,060 a square foot. According to real estate sources, the new owner plans to convert the property into a hotel.
The Statuto Group has also been accepted as the winning bidder for the 665-room Sheraton Manhattan, at 790 Seventh Ave. and West 51st Street. It is paying about $850,000 a room and after renovations the group plans to change the name of the hotel to Le Meridian. Before the end of the year, the winning bidder is expected to be selected for the 1,015-room Hotel Roosevelt on Madison Avenue.
Last week, Nevins Realty sold a development site at 300 Schermerhorn St. in downtown Brooklyn for $11.9 million, or $143 a buildable square foot, to Tyler Hospitality, which plans to build a hotel on the site. Tyler Hospitality is presently building a 300-room hotel in Times Square.
A number of five-star hotels are scheduled to open in Lower Manhattan, including the Moinian Group’s W New York Downtown Hotel & Residences. The chairman of the Moinian Group, Joseph Moinian, said: “When I bought the site at 123 Washington St. three years ago and applied for Liberty Bonds for the development of a hotel, people thought that I had lost it. But I knew that downtown Manhattan was the most disproportionately balanced market in the nation with just 2,400 rooms serving 100 million square feet of office space. By comparison, Midtown has 65,000 rooms serving 300 million square feet of office space, while Chicago has 35,000 rooms serving 150 million square feet. We were the first to buy land for this purpose and the only ones to secure financing through the Liberty Bonds program. When it opens in 2009, the W New York Downtown will bring a young and exciting atmosphere that’s been missing downtown for the investment banking, insurance, and corporate headquarters being drawn to the existing and new office space being built in this area.”
Toward the end of 2007 or in early 2008, tourists will have the opportunity to rent a room in the 45-room Duane Street Hotel, a development of Hersha Hospitality and McSam Hotel, and the 91-room Downtown Hotel at 377 Greenwich St., owned by BD Hotels and Robert De Niro.
Eco-boomers and yuppies are paying rents of more than $80 a square foot to live in Avalon Bay Communities residential rental buildings in this hot neighborhood in the Lower East Side. Each day, new restaurants and boutiques are opening in addition to the hotels.
Projects that are expected to be completed over the next 18 months include Thompson Hotels’s 112-room Thompson LES at Allen and Stanton streets; LoungeSleep Hotels’s 148-room Cooper Square Hotel at 25 Cooper Square; the 106-room Wyndham Hotel at 93 Bowery at Hester Street; the 102-room Best Western at 231 Grand St., and the 63-room hotel developed by Peter Moore Associates at 250 Bowery.
As I reported last week, visitors are flocking to Lower Manhattan, giving the area the highest tourist traffic next to Times Square.
More than 50% of the hotel rooms are planned for Midtown Manhattan. Hotels range from the five-star Crillon Hotel at 105-107 West 57th St. to more than 3,000 rooms for the West Side near the Javits Convention Center and the Hudson Yards area.
“The convention center area has always been underserved by hotels and our company is one of the three final bidders for the massive new hotel in partnership with Marriott,” developer Joseph Moinian said.
Many limited service hotels are planned in Midtown, especially in the vicinity of Penn Station and the Port Authority. “The Penn Station and West Side rail yards project has the potential to generate substantial additional demand, filling many of the areas new and existing hotel rooms,” a managing director of the Ackman Ziff Real Estate Group, Mark Owens, said.
The chairman of Metropolitan Valuation Services, Martin Levine, said: “Although interest in acquiring sites suitable for multifamily development in the city is slackening somewhat, there seems to be no end in the appetite for hotel sites, particularly in Manhattan.” Mr. Levine said he has recently seen a number of contracts pending and deals in progress for sites that range in price between $55 per FAR in Jamaica, Queens, and $311 per FAR for a site in west Chelsea, to a deal at around $625 per FAR for an all-suite Midtown East site.
“Average daily room rates for these planned Manhattan hotels are expected to be more than $500 per night in Chelsea and $800 per night for the all-suite hotel,” Mr. Levine said.
Due to the turmoil in the credit markets, lenders are tightening the reins on the financing of hotels. Lenders have changed their underwriting criteria, requiring developers to increase their equity investment for a development. Critical to investment underwriting is how much local demand there will be, especially in Queens and Staten Island.
Mr. Owens of the Ackman-Ziff Real Estate Group said: “The increased construction costs have helped to constrain supply additions and the recent liquidity issues in the debt capital markets will further curtail supply growth. The lending environment, which has changed significantly over the last several months, will further constrain supply. Lenders are now able to cherry pick the existing pipeline of construction projects, those deals without good sponsorship, a qualified development track record, and an abundant supply of liquidity are less likely to be financed in today’s environment. Branding has also become an important consideration — proven boutique brands as well as national chains are almost essential to finance a deal in the current marketplace.” Mr. Freud of Troutbrook said: “It is interesting to note, that when we shopped for construction debt for the building of our hotel in Brooklyn, the more competitive term sheets came from institutions whose main headquarters were based outside the New York regional marketplace. As recently as five months ago, there were a lot more debt providers in this town willing to lend on this asset category with the region than there are today.”
The signs continue to be bright for the hospitality industry in New York. I concur with the managing director of the Hospitality & Gaming Group at Cushman & Wakefield, Eric Lewis, when he says: “The Manhattan lodging market continues to amaze and is anticipated to remain healthy, despite the expected increase in supply.”
Mr. Stoler, a contributing editor to The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.