The credit crisis and the turmoil in the capital markets are definitely affecting the sale of office and residential properties in New York City, but one sector of the city real estate market that so far appears immune to the economic turbulence is hospitality.
Still, some hotel experts fear that an oversupply of rooms in the pipeline could lead to a drop in prices and that a decrease in the availability of financing could spur a downturn for the booming industry, despite the fact that properties are trading hands frequently.
For now, record-breaking occupancy and daily room rates reaching as high as $800 a night are pushing sales prices to all-time highs, and increasing the number of transactions.
After the death in August of Leona Helmsley, her estate retained an investment banker to market the Helmsley hotel chain for sale in 2008, industry leaders say. The properties include the 46-story Helmsley Park Lane on Central Park South; the New York Helmsley at 212 E. 42nd St., between Second and Third avenues; the Helmsley Carlton House on Madison Avenue at 61st Street; and the Helmsley Middletowne at 148 E. 48th St., between Lexington and Third avenues.
"The year 2007 will be one for the record books, with about every indicator showing upward trends," the chairman of Lodging Investment Advisors, LLC, Sean Hennessey, said. "Occupancy is likely to finish the year above 84%, or about one percentage point higher than last year. Many hotels in Manhattan will exceed 90% occupancy for the year, and some are likely to exceed 95% occupancy. Average room rates are up more than 13% through the first 10 months of the year, with two more strong months to go."
With these events taking place, investors and developers are exhibiting a voracious appetite to own and develop new hotels.
"There continues to be an unprecedented amount of global capital available for New York City hotels," a principal at Cushman & Wakefield Sonnenblick Goldman, Mark Gordon, said. "Equity is more available than debt, but both are available for good deals."
But while equity is available, debt for financing is drying up.
Arguably the greatest concern to owners and investors in the hospitality sector is the availability of inexpensive financing. In the last three months, several prominent investment bankers have stopped lending to the sector. European banks and balance sheet lenders have picked up some of the lending with more stringent underwriting criteria, including significant equity from the developer. Many hotels slated for development in the boroughs outside Manhattan have been put on hold, and their sites are being offered for sale.
Still, some hotel experts see a glut in the number of new rooms coming onto the market in the next few years.
"There will be a lot of pain," a principal at BD Hotels, Richard Born, said. "Budget hotels being developed for $400,000 per key and luxury hotels being developed for $1 million-plus per key will not survive."
"I am very worried about the fate of the hotel industry over the next two to four years. I have seen studies listing likely hotel developments totaling anywhere from 13,000 to 18,000 rooms," he said. "Additionally, I am constantly hearing about more projects not included in these studies. I think it is reasonable to assume that in the next three years we will see a 30% increase in available room inventory in Manhattan."
"Although we have seen annual growth in visitation to the city increasing 4% to 5% per year in recent years, I believe that this will soon level off for many reasons, not the least of which is the fact that our airports are already running over capacity and flights to New York are likely to decrease rather than increase," he said.
Most developers new to the New York City hotel market do not understand that an increasing inventory of rooms is likely to have a "profound effect" on the average daily rate, Mr. Born said.
"I predict that with a rapid rise in inventory that will result in perhaps even a subtle change in occupancy, we will see an enormous plunge in room rates," he said. "Our rates have risen 100% over the past four years. I would not be surprised if we return to 2003 average daily rate levels. This will translate to a potential 50% decrease in projected gross revenues and a near total wipeout of operating profits."
During the third quarter of 2007, a number of hotel properties changed hands.
The Michigan Retirement System is joining the ranks of investors interested in owning hotels in Manhattan. Earlier this month, the retirement system acquired the 14-story, 369-room Hilton Garden Inn at 709 Eighth Ave., on the corner of West 48th Street, and the 10-story, 300-room Hampton Inn Manhattan — Times Square North at 851 Eighth Ave. The state system is paying $475 million, or about $710,000 a room.
In October, Gemini Real Estate Advisors announced the acquisition of the 78-room, limited service Times Square Comfort Inn at 305 W. 39th St. It paid $31.74 million, or $407,000 a room, for the newly built hotel.
In June, Hotusa Group and Losan Hotels World purchased the 107-room Dylan Hotel at 52 E. 41st St. It paid $78 million, or $729,000 a room, for the property, which previously served as the home of the Chemists' Club. The seller was the principal of the Fortuna Realty Group, Morris Moinian, who purchased the 10-story former club in 1997. Fortuna did a full renovation of the club, adding four floors and opening a restaurant and bar at the facility.
A few weeks later, Hotusa Group made its second purchase in Manhattan, paying $31.5 million — or $594,400 a room, one of the highest prices ever paid for a hotel in Lower Manhattan — for the 53-room Exchange Hotel. The hotel, at 129 Front St. near the South Street Seaport, was built as the Manhattan Seaport Suites Hotel and completely renovated in 2005, when it became the Exchange.
One of the most active buyers of hotels in Manhattan has been Highgate Holdings. This fall it paid $204 million, or $758,364 a room, for the 269-room On the Ave. Hotel at 2178 Broadway near 77th Street, on the Upper West Side.
A Rhode Island-based hotel owner and operator, the Procaccianti Group, has purchased two hotels in Manhattan. The properties include the leasehold interest in the 300-room Tudor Hotel at 304 E. 42nd St., at the corner of Second Avenue, for which the group paid about $110 million, or $367,000 a room. Procaccianti also purchased the 227-room Holiday Inn SoHo at 138 Lafayette St. It paid $128.6 million, or $566,500 a room.
A number of new hotels are planned for construction, Mr. Hennessey of Lodging Advisors Investment, LLC said. "The pipeline suggests that 190 hotels with 21,211 rooms may be eventually added to an existing stock of 398 hotels and 80,612 rooms," he said. "This level of growth is unprecedented in the history of New York and demands serious consideration."
Hoteliers are increasingly looking south of Midtown for better deals on new developments. "The Midtown South area can be characterized as the epicenter of this most recent wave of hotel development," the chairman of Metropolitan Valuation Services, Martin Levine, said. "There are at least 17 hotels planned in proximity to the Empire State Building. Of the 21 land sales we tracked in the area during the past 12 months, 14 sites were purchased for hotel construction, two for mixed-use hotel and apartment condominiums, and five for condominiums."
Construction is under way at 176 Madison Ave., at the corner of East 33rd Street, on a 100-room boutique hotel with 69 condominium residences. The 134,200-square-foot building is a project of the Russian developer Natalia Pirogova, who paid approximately $450 a developable foot for the site.
The owners of the successful Hotel Gansevoort at 13th Street and Ninth Avenue in the meatpacking district, Gansevoort Hotels, have begun construction on their second Manhattan hotel. They are developing the 19-story, 225-room glass and limestone Gansevoort Park at a cost of more than $200 million. The project, at Park Avenue South and East 29th Street, is scheduled to open in 2009.
A joint venture of Simon Development Group and a real estate investment fund is developing a 36-story, 200-room luxury boutique hotel at 11 E. 31st St., between Madison and Fifth avenues. The 100,000-square-foot tower is expected to be completed in 2009.
This fall, 241 Fifth Ave. Hotel LLC, whose principals are Jack Hazan and Dan Shavolian, purchased a development site at 241 Fifth Ave. for $26.5 million, or about $400 a buildable square foot. The new owners are planning to construct a hotel on the site, on Fifth Avenue, between 27th and 28th streets.
A few blocks away, developer Andrew Impagliazzo plans to build a 23-story boutique hotel on two parcels at 30 and 32 W. 31st St., between Fifth Avenue and Broadway. The properties were sold for about $12 million.
Manhattan will have a second Crowne Plaza Hotel in Midtown, as a joint venture is planning to begin construction next summer on a 316-room hotel on East 34th Street, between Park and Madison avenues.
Brack Capital Real Estate is bullish on the New York hospitality industry. Last month, it purchased the former Moondance Diner site at 27 Grand St., along Sixth Avenue. It paid about $33.3 million to Gary Barnett's Extell Development for three lots bordered by Sixth Avenue and Thompson Street, where it plans to build a 114-room hotel.
Earlier this year, Brack purchased the ICON parking lot site adjacent to the Atlantic Bank of New York Building on West 35th Street, between Fifth and Sixth Avenues. It plans to build a 300-room luxury hotel adjacent to another limited service hotel being developed by McSam Hotels.
"Hotels under construction or in the planning and development phase run the gamut," the senior managing director of the hospitality and gaming group at CB Richard Ellis, Daniel Lesser, said. "High-tier developments include the recently announced Orient Express Hotel for 24 W. 53rd St.; the inclusion of a 171-room upscale boutique hotel at 330 Hudson St.; a Kimpton Inn on West 53rd Street and Eleventh Avenue; and one in a mixed-use project on Sixth Avenue, between West 29th and West 30th streets."
The City Council last month approved plans for 50 West St., a proposed $600 million, 63-story, 580,000-square-foot hotel and residential building in Lower Manhattan to be developed by Time Equities Inc. The project will comprise a 155-room, four-star luxury hotel on floors one through 14, with ground floor retail and a restaurant. About 290 condominiums will occupy floors 15 through 63.
Despite all the activity, a number of prominent real estate and hospitality experts expressed caution about the future of the marketplace because of the turmoil in the credit markets, as well as the inexperience of new entrants to the hotel market.
A principal at Thompson Hotels, Michael Pomeranc, said: "The continued construction of chain hotels predominantly dominates the hotel landscape in Manhattan. Some will be successful, and some will be more successful."
"The cost to build these properties is the wild card," he said. "Banks lend to people who have little or no experience in developing in Manhattan and New York City. Today banks will lend less because of the turbulent credit markets, and close their eyes to how developers raise their equity, as well. Mezzanine lenders fill that void and cause these hotel developments to become overly expensive to build and stabilize. These projects run a higher risk of financial problems, even if hotels run full and rates are healthy. Debt service on budget and commercial hotels may become too burdensome because of the additional costs attributed to inexperienced novice developers and expensively tiered money."
"The hotel industry is healthy; it's the lending practices that aren't," Mr. Pomeranc said.
The managing director of the hospitality and gaming group at Cushman & Wakefield, Eric Lewis, said, "The credit crunch has certainly slowed things down, but by comparison to other U.S. cities, New York is a very active hotel investment market."
"The city is dramatically under-hoteled, even with these additions," a principal at Gansevoort Hotels, Michael Achenbaum, said. "However, the city is not under-hoteled for hotels with poor locations and an ill-estimated cost structure."
Mr. Achenbaum said he feels that many of the developments will never be built because of a "tremendous overreaction" by lenders, who have now turned off the financing of the hospitality industry.
A managing director at the Ackman-Ziff Real Estate Group, Mark Owens, said: "The current instability in the debt market and the limited availability of floating rate debt has significantly impacted the ability to obtain the necessary funds to move forward with projects. Lenders are able to cherry-pick from the existing pipeline. Strong branding and distribution will be able to be financed in the current environment."
Mr. Hennessey of Lodging Advisors Investment, LLC said: "The biggest risk for many hotel owners is the slowdown of the national economy. This could lead to less hotel demand relating to job training, new employee recruitment, and the like."
I concur with Mr. Hennessey when he says, "All things considered, 2007 will likely be one of the best years in memory for many hoteliers. But the big question at hand for 2008 is, will this continue?"
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 [email protected]