One segment of the real estate market that appears to be weathering the storm is the hospitality industry. While investors have been reluctant to purchase commercial real estate in New York City, where prices have dropped between 10% and 15% as a result of the credit crisis and the dislocation of the capital markets, hotels are being planned and are under construction around Manhattan.

Still, industry leaders warn that like the rest of the real estate market, financing for new hotels has all but dried up except for the most established developers.

On April 1, actor-director Robert De Niro and developer Ira Drukier, together with their partners Richard Born and Raphael De Niro, opened the Greenwich Hotel in the heart of TriBeCa at 377 Greenwich St. The eight-floor building has 88 rooms and is one of the few hotels going up in Lower Manhattan that obtained $39 million in tax-exempt Liberty Bonds.

At least four new hotels are under construction near Grand Central Terminal and the Plaza Hotel. On the former site of the YMCA, the Shangri-La Hotel, designed by Lord Norman Foster, is scheduled to open in late 2010. The 206-room luxury establishment, perhaps New York’s most expensive new hotel, will be built in a new 64-story tower with an entrance on 53rd Street between Park and Lexington avenues, adjacent to the landmark Seagram Building. In addition to the hotel, 17 high-end condominiums will occupy the top 10 floors of the tower.

On the corner of Lexington Avenue and 48th Street, the McSam Hotel Group is developing a 120-room, all-suite hotel. Nearby, on East 52nd Street off Third Avenue, McSam is building a 240-room Hyatt Place hotel.

Orient-Express Hotels plans to build a 150-room luxury hotel at the site of the Donnell branch of the New York Public Library, at 24 W. 53rd St. Orient-Express is the owner of the ’21’ Club, which backs onto the library premises, and the two buildings would be connected. When completed, the new hotel will be marketed under a new ’21’ Hotel brand name.

As I reported last year, the estate of Leona Helmsley plans to sell its three major Manhattan hotels. The hotel that is expected to command the highest price is the Park Lane Hotel, less than half a block from the newly opened Plaza Hotel. The 46-story, 640-room Park Lane is at 36 Central Park South and was built in 1971. Industry leaders expect the property to fetch close to $800,000 a room.

Later this year, investment sales brokers are expected to go to market for the New York Helmsley Hotel, on the corner of Third Avenue and 42nd Street; the Helmsley Carlton House, on Madison Avenue and 61st Street, and the Helmsley Middletowne, on East 48th Street between Lexington and Third avenues.

A number of other hotels are expected to be marketed for sale. In the Lincoln Center area, the recently renovated 413-room Empire Hotel, on the corner of West 63rd Street and Columbus Avenue, is now a chic boutique hotel with a pool deck and rooftop lounge. On the corner of West 57th Street and Sixth Avenue, an investment banker has been retained to see if investors have an interest in the Buckingham Hotel. The 17-story, 100-room hotel, which consists mostly of suites, was built in 1929 and is expected to fetch at least $700,000 a key. In Times Square, expect to see a new owner of the 597-room Paramount Hotel, at 235 W. 46th St. between Broadway and Eighth Avenue. In Murray Hill, industry leaders expect the owners of the 208-room Hotel Roger Williams to sell before the summer.

“Buyers, due in part to current debt markets, are bidding less for properties than 12 months ago,” the managing director of the hospitality and gaming group at Cushman & Wakefield, Eric Lewis, said. “However, few if any sellers are under pressure to sell since the fundamentals have held up in New York City, with revenue per room growing nicely to this point in the year. The net result is no transactions that can be pointed to as an indication of where the market is headed in terms of value.”

He added, “Much of the supply in the pipeline will be delayed or canceled, given lenders’ reluctance to finance anything but proven properties with a strong track record and good sponsorship. This is bad news for the developers of those projects, but good news for the market.”

“Although the first quarter of 2008 has seen continued increases in occupancy and room rates, many hoteliers say the economic slowdown has started to become apparent,” the founder and CEO of Lodging Investment Advisors, Sean Hennessey, said. “Some groups are seeing a falloff in the number of actual attendees compared to what was initially envisioned. Some corporations are not using as many rooms as anticipated. And some companies are asking for concessions on room-rate contracts they negotiated last fall. There has yet to be any significant price wars between hotels, but that situation could change quickly.”

“Because hotels have no leases, everything is built ‘on spec,'” Mr. Hennessey said. “The market is simply less efficient than with other commercial real estate, where tenant leases drive deals. Compounding things, many hotel developers build not to meet unmet demand but to worsen their competitors. The New York City hotel market has always maintained a good occupancy level, but that is not enough to ensure profitability because operating costs are so much higher in our market. Right now, we’re seeing a lot of developers reassessing the feasibility of their projects. I believe that in the longterm there is a need for more hotels in New York, particularly upscale hotels, but the credit crunch may set the market back several years.” “The demand for hotels from an investment perspective is still very strong, and the market of investors has expanded significantly, with substantial overseas interest,” the managing director of Ackman-Ziff Real Estate Group, Mark Owens, said. “Well-capitalized overseas

buyers have the two advantages: the ability to capitalize on the weak dollar and they rarely require financing, avoiding the current lender liquidity constraints. Additionally, there are a number of international hospitality brands lacking a presence in New York. Strategic buyers in need of additional distribution will likely sacrifice investment yields to establish a presence in Manhattan, further supporting the current sales environment.”

The crisis in the capital markets, the impending recession, and the general fallout in the economy have some industry leaders cautiously optimistic on the hospitality industry.

“We will definitely not see the growth in the occupancy or room rate of previous years, but at this stage it looks like at worst it will be a flat year of growth,” the executive vice president of Anglo Irish Bank, Paul Brophy, said. “With the dollar continuing to weaken to historic lows, and the lag in the impact of the credit crisis on the general economy, our view is that the real challenges will come in 2009–10, as the economic slowdown impacts corporate decisions, as well as the individual traveler, whether domestic or international.”

Mr. Brophy added: “In terms of supply, there is definitely going to be considerable increases in the key count based on projects under construction, but financing for these projects going forward will become extremely difficult as we enter far more uncertain times. Hotel financing will only be available to the experienced and well-capitalized operators, and not to the opportunistic short-term investor.”

Ackman-Ziff’s Mr. Owens said: “Given the state of the capital markets and the current liquidity constraints, coupled with capital constraints of some New York developers, the likelihood of numerous hotel projects around the city coming to fruition is significantly reduced, which bodes well for the overall strength of Manhattan.”

“Financing for hotels is like the wild, wild West,” one hotel developer, who requested anonymity, said. “Pricing last month was LIBOR plus 250, and this month the pricing is at least LIBOR plus 325 to 400 basis points. Developers are rethinking how to build and change material use to lower construction costs to get a deal done.”

A principal at Palisades Financial, Ira Bergstein, said: “We have seen more hotel deals in the last four months than in the cumulative 18 months prior. What does this tell me? Hotel developers previously looked to the collateralized mortgage-backed securities market and money center banks for the funding for these projects.

“Obviously the traditional sources are ‘closed for lunch’ and they are now looking to opportunity funds for capital. Opportunity funds seek a higher rate of return than the CMBS and traditional lenders; therefore, the cost of capital — if available — has increased dramatically. ‘Find me the money’ is the mantra of hotel developers today.”

“I am building more than 25 hotels in New York City and expect to develop more over the next few years,” the chairman of the McSam Hotel Group, Sam Chang, said. “Sources of financing continue to remain available to our company. We are evaluating our options and plan to announce the sale of a few hotels on May 1. We are bullish on the hospitality industry, as evidenced by our hotel projects, which include our new Sheraton Hotel, which will open next month at JFK, and our many projects in Manhattan. One thing is certain: that hotel projects which need financing in excess of $100 million are having difficulty in securing financing.”

“There has clearly been an overcorrection in the capitalization marketplace, which has a direct correlation to the virtual shutting down of the CMBS industry,” the executive vice president and head of the U.S. Hotel Group at Cushman & Wakefield Sonnenblick Goldman, Mark Gordon, said. “However, financing is still available at more historic levels. There are quite a few lenders who are actively pursuing hotel loans in the range of 65% loan-to-value. Furthermore, the mezzanine lender market continues to deepen, with more entrants expressing interest on a weekly basis. This capital is available in the 65% to 70% range, and will become increasingly more competitively priced over the next few months.”

“Some believe that during the past several months, U.S. hotel values have moved sideways, while others are of the opinion that declines of up to 30% have been experienced due to the credit crisis,” the senior managing director of the hospitality and gaming group at CB Richard Ellis, Daniel Lesser, said. “With the sales market at a near standstill and profits still increasing, U.S. hotel owners are under little, if any, pressure to sell.” “We have seen a marked increase in construction loan submissions in the city for very high end boutiques, assuming average daily rates in excess of $600 per night, with occupancy estimates in the high 80s,” the vice president in charge of hospitality lending at M&T Bank, Jason Lipiec, said. “It appears that everyone feels they can mirror the successful hoteliers who have substantial revenues from food, beverage, and club revenues they have created. Many of these new requests have come from players new to hotels or Manhattan. In light of the current market conditions, I do not believe many of these properties will be built, or if so, will require a substantial amount of additional equity.”

He added: “Hotels will be financed for borrowers who have strong, long-standing relationships with portfolio lenders, where the developer is willing to inject as much as 30% to 40% equity and provide recourse. Most lenders are preserving capital and focusing on their clients’ need first.”

The chairman of Muss Development, which owns the Marriott at the Brooklyn Bridge, Joshua Muss, said, “If the project is well-conceived, properly located, well-built, and reasonably priced, be it residential, office, retail, or hospitality, there does not seem to be a negative impact at this time. Obviously, financing is more costly and there are fewer competitors. But the banks are more ready to make loans under more conservative guidelines to established players. If the established player has traditionally been conservative, then the impact on his operation is de minimis, and there is no difference in the field of hospitality.”

“The credit market challenges and uncertainty which prevail in the general-purpose-property market today are also prevalent in the hospitality sector,” the chairman and CEO of Cushman & Wakefield Sonnenblick Goldman, Thomas MacManus, said. “There clearly is a flight to quality, so properties in supply-constrained markets such as New York City with quality sponsors and strong fundamentals attract financing, but at today’s pricing and lower leverage levels. Equity is also available at today’s required returns, not those aggressive levels from a year ago.” By most indications, the outlook continues to look positive for the New York City hospitality industry. We can expect to see a number of new hotels opening in all of the boroughs. Financing will be difficult, but remains available for established, well-capitalized hotel operators. I concur with Daniel Lesser when he says: “The glass is half-full and the future looks quite bright from where I sit.”

Mr. Stoler, a contributing editor of 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.