Reasons To Be Bullish About City’s Hotel Industry

Some veteran executives of the hospitality industry are bullish on the state of the hotel market, while others are cautioning that investors are cognizant of the serious problems with America’s economy, including the reeling airline industry, the loss of values in the domestic and European stock markets, and the possibility of rapid inflation.Last week, tens of thousands of visitors came to New York City to attend Major League Baseball’s All-Star festivities. At the end of August, the city will once again be swamped, with travelers attending the U.S. Open. Coupled with the weak dollar, these events have helped strengthen the hospitality industry.“New York City is one of the few destinations in the country that continues to benefit from the weak dollar, pent-up international demand, and limited additions to the supply of full-scale, high-end hotels,” the chairman and CEO of Loews Hotels and co-chairman of the board and member of the office of the president of Loews Corp., Jonathan Tisch, said. “Hence, the well-known, internationally recognized branded hotels are continuing to show solid occupancy but slowing increases in average rates.”He added: “The worrisome scenario for the hotel business in New York would be for the dollar to strengthen, the coming online of many of the smaller hotels, and a continued weak economy. Once the hotel industry feels stress, that then ripples through the entire travel and tourism industry, which is essential to New York City’s economy.”Some industry leaders are very concerned about the state of the hospitality industry. “The stock charts of some of the leading U.S. hotel ownership and fee management companies are an indication of where on a macro basis the New York City hospitality industry is perhaps headed,” the principal at the Troutbrook Companies, Marc Freud, said. “As the fog of economic uncertainty hangs over the business and leisure traveler, most of these companies are witnessing a 15% to 20% decrease in revenues and share prices. Though these double-digit percentage decreases in revenues translating to the New York City marketplace are not foreseen, a flattening of the revenue per room is the best case scenario, and if credit markets continue to be strained into 2009, a broader negative impact on the average daily rates and revenue per room will certainly follow.”The managing director for the hospitality and gaming group valuation services at Cushman & Wakefield, Eric Lewis, said many of the hospitality projects in the pipeline “will have a very difficult time getting financing in the near term. Not great news for developers of those projects, but potentially very good news for existing properties. As for the additions to supply that will deliver, those properties that were well-located, well-conceived, and well-capitalized will perform well. The current downturn notwithstanding, New York’s position as one of the world’s most sought-after destinations are not going to change.”The CEO of Lodging Advisors, Sean Hennessey, said the bad economic news “makes it hard to believe that the worst is over. At the very least, a high degree of uncertainty about the economy is likely to affect the plans of travelers, business enterprise, and virtually all decision makers in the economy.“According to my research, the hotel market is weaker in ways that don’t show up in occupancy and room rate statistics. Turn-away demand, which a year ago was significant, has nearly disappeared for many hotels. Booking horizons for both transient and group travel have been shrinking for some time, a sign that many travelers and corporations are becoming more cautious. Perhaps more significantly, it appears that the New York hotel market is seeing a decrease in corporate travel. The slack is being taken up by tourists, especially foreign tourists paying with the Canadian dollar, the British pound, and the euro. It is great that we can readily attract foreign tourists, but the weakness in corporate travel is likely to continue to affect the local hoteliers,” Mr. Hennessey said.He added: “The New York City hotel market is just doing fine. For the first five months of 2008, occupancy is up 0.1 percentage point, to 80.2%. The average daily room rates are up 7.7% to $258.11, and the revenue per room is up 7.8%. The first three weeks of June show some slowing, but no indications that the bottom is falling out of the New York.”Stringent underwriting requirements are now the rule for developers attempting to obtain financing for new hotel projects. In many instances, the few lenders that continue to provide financing are requiring that developers have between 35% and 50% of equity and full recourse on the financing and are pricing the loan at rates ranging from 350 to 700 basis points more than Libor.“As global economies slow, with both consumers and corporations making cutbacks, the next couple of years will be far more difficult for the New York hotel market,” the executive vice president of Anglo Irish Bank, Paul Brophy, said. “With that backdrop, the financing of hotels and particularly new construction will prove more challenging. With the credit markets practically frozen, it will only be the long-established developers with proven track records who will get deals done. Such deals, however, will require up to 50% equity with recourse and land being contributed at cost or a very low basis. This is not helped, either, by $130 oil that is forcing airlines to cancel flights and ground planes, putting further strain on the hotel industry.”Even with the credit crisis and capital dislocation, a number of investors and developers are planning to develop hotels. Projects that are in various stages of construction and planning in Midtown include the Hyatt Andaz at 485 Fifth Ave.; the “1” Hotel across from Bryant Park; the 56-story, mixed-use hotel and condominium development at 400 Fifth Ave. at the corner of 36th Street being developed by RFR Realty; the five-star Shangri-La Hotel at 641 Lexington Ave.; a proposed hotel at the corner of 521 Fifth Ave., and Hotusa Hotels’s mixed-use development at 70 W. 45th St.Later this month, investors are expected to submit the second bid for the purchase of Helmsley’s Park Lane hotel. A handful of well-capitalized investors are planning to purchase the crown jewel of the Helmsley enterprise. A number of the possible purchasers may have an interest in converting the Central Park South property into residential condominiums. Industry leaders expect the 589-room hotel, which houses the former home of Leona Helmsley on the top two floors, to trade for $650 million, or $1.1 million a key.Another property that is on the market is the 100-room Buckingham Hotel at 101 W. 57th St. on the corner of Sixth Avenue.“The hospitality industry has always been a notoriously volatile sector in terms of making loans,” the president and co-CEO of Kennedy Funding, Jeffrey Wolfer, said. “A borrower’s ability to repay a loan is going to be based on occupancy, and with the current state of the economy, people are cutting back wherever possible. Big-city markets, like New York, and unique, unusual hospitality projects are the exception. In Manhattan, property values are strong, and quality hotels will always be in demand. For a direct lender, the uncertainty of the economy actually creates opportunity. With bank loans tougher than ever to close, developers are seeking a source that not only can and will make the deal happen, they want one that can make it happen fast.”The head of real estate at the Bank of Scotland USA, John Gunther-Mohr, said: “While we can see signs of overbuilding in the current market, there are also ample signs that new development is being shut down perhaps faster than during any previous cycle due to the capital markets distress. If the reduction of new supply becomes evident to the market, investors may add an ‘oversupply penalty’ to the already baseline increases in cap rates. If this happens, perhaps hotels, as a property class, will not suffer dramatic value losses, at least losses exceeding general property values.”The president of Winter & Co. Commercial Real Estate Finance, Gregg Winter, said there is “a shrinking pool of construction lenders still willing to consider ‘birthing’ a new hotel project. These lenders will need to hear a very compelling thesis and a strong argument as to why the proposed new hotel should be brought into being. Next, a strong flag, or franchise, and successful, experienced operating partners are essential. And then, it must be clear that the developer has very deep pockets, meaningful guarantees, and the ability to pony up anywhere from 35% to 50% of the total project cost.”He added: “Construction lenders are acutely well-aware that a hotel is ‘a business wrapped in real estate,’ and that the developer must not only build, furnish, and staff it, but must also successfully start a new hotel business, and that all these variables will be played out over a period of several years until the new hotel is capable of producing enough cash flow to support a permanent loan to replace the construction loan. At the end of the day, whether the hotel ever reaches that point will depend on many economic variables beyond the developer’s control.”The managing director of Ackman Ziff Realty Services, Mark Owens, said that, as the markets continue to evolve, “new hotels need a compelling story in order to secure financing. The basis must be reasonable, and sponsorship must be experienced in the hotel development world. The location must be irreplaceable and have high barriers to entry, while the debt will typically require some form of recourse. On the transaction side, the weak dollar is helping insulate Manhattan, as international capital sources and brands are seeking product, and distribution within the city. Increased capital costs for national owners and developers will tighten the domestic transaction environment and supply side of the equation going forward.”Instead of being a pessimist in these days, I am cautiously optimistic on the New York hospitality industry, and concur with Sean Hennessey when he says: “The global economy has continued to show strength, and New York’s role as a global city helps to insulate it from some of the shocks now impacting our country.”Mr. Stoler, a contributing editor of The New York Sun, is a radio and television broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.

Reasons To Be Bullish About City’s Hotel Industry

Reasons To Be Bullish About City’s Hotel Industry

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