More than 44 million people are expected to visit New York this year, requiring more and more hotel rooms and helping to make the city one of the fastest growing hotel markets in the country. Last year, the city's hospitality industry shattered records by getting an average daily rate of $265, with an occupancy rate of 85%. Nearly all of the city's hotels were operating at capacity, and in the month of December, the average daily room rate reached $330.
Based on the pace of the first six months, those records will be broken in 2007. Manhattan is the no. 1 business district in the country, yet only seventh in size from a hotel guest-room perspective: It has about 66,000 rooms, compared with 150,000 in Las Vegas.
"Lodging assets have become one of New York City's most desired asset classes and their performance continues to grow at a frantic pace, beating all historical benchmarks," the managing director of the Ackman-Ziff Real Estate Group, Mark Owens, said. "Manhattan's record-demand growth is attributed to increased corporate spending, a strong economy, and rebounding overseas visitors due to the weak dollar. Two other components have assisted Manhattan hoteliers: substantial inventory reduction, a result of hotels being converted to residential units, and increasing construction costs," he added.
"Since the city is ‘under-hoteled' as compared to other top international markets," the managing director and a principal at Sonnenblick Goldman, Mark Gordon, noted, "we can't have too many hotels for the foreseeable future." He added, however, that the operational complexities of the hotel business are often underestimated.
Demand appears to be increasing for the near term: The city may lose 3,000 rooms over the next few years. Industry leaders expect Vornado Realty Trust to demolish the 1,700-room Hotel Pennsylvania to make way for a mixed-use development in the Penn Station area, and, as I reported last week, the owners of the 1,015-room Hotel Roosevelt have retained an investment banker to sell the property, which will probably be razed to make way for a commercial office building.
All this makes it a good market for building hotel units, analysts say: "Considering that, just a few years back, hotels were not considered an asset class on a par with other forms of real estate, the hotel industry has come a long way," a senior managing director at CB Richard Ellis, Daniel Lesser, said.
"Hotels are being planned and developed throughout the five boroughs and encompass all asset classes: boutiques, business-class, select service branded, economy class, independents, and major brands," Mr. Lesser, whose bailiwick is as an industry leader for valuation and advisory services at CB Richard Ellis's hospitality and gaming group, added.
The largest number of new hotels is planned for Midtown Manhattan, according to Mr. Lesser. Five thousand rooms are expected to open in 2007 and about 13,000 hotel rooms are currently in some phase of development in Manhattan.
"As rates and occupancies continue to surpass historical levels, hotel development economics are again becoming favorable and are spurring a variety of new hotels and projects throughout the city," Mr. Owens observed. "The current pipeline of development, be they branded, upscale, or limited service, can only enhance a market that is constantly turning away demand."
Assuming a static environment, the additions to supply in this highly competitive market will enable the city to better accommodate those turned-away travelers. However, Manhattan is not static, Mr. Owens added, suggesting that, as the city continues to grow and transform, new hotels will be necessary to maintain the market's ability to efficiently host its guests.
According to a report by HVS International, at least 2,777 boutique hotel rooms are expected to enter the Manhattan market over the next three years. A senior vice president and head of hospitality lending for HSH Nordbank, Frank Anderson, said, "The New York City and, particularly, the boutique-hotel markets are thriving at this moment with weekday business travelers and weekend leisure travelers."
More than 25 hotels are expected to open over the next 18 months. The most luxurious hotel planned is within the renovated Plaza Hotel site. This October, in celebration of the 100th anniversary of the Plaza, a 130-unit transient luxury hotel and 152-unit condominium hotel are expected to welcome their first guests. Other hotels will include the 90-room Six Columbus Hotel, across from the Time Warner Center; the renovated 420-room Empire Hotel, across from Lincoln Center; the Hilton Garden Inn, at 6 York St.; the Duane Street Hotel at 130 Duane St.; the 150-room Four Points SoHo, at 66 Charlton St., and Robert DeNiro, Richard Born, and Ira Druckier's 90-room Downtown Hotel at 377 Greenwich St.
More than 50 hospitality projects now in various planning stages are scheduled to open throughout the city beginning in 2008. Many of these are boutique hotels in Lower Manhattan, the West Village, the High Line area, Midtown, the east side, and in Harlem. Notable projects include the "1" Hotel and Residences at Bryant Park, the W Hotel and residences on Washington Street, the Andaz by Hyatt on Fifth Avenue across from the New York Public Library, the Andaz at 75 Wall St., the ultraluxury Shangri-La Hotel on East 53rd Street, the Hotel Indigo at 127 W. 28th St., the W Hotel and residences on Flatbush Avenue in Brooklyn, and the Thompson LES on Allen Street, on the Lower East Side.
Last month, a ceremonial groundbreaking was held for the city's first ground-up time-share ownership residential hotel. The West 57th Street by Hilton Club will rise between Sixth and Seventh avenues on the former home of a Horn & Hardart. When completed in 2009, the 28-story tower will have 161 units. The first timeshare condominium in Manhattan, the Manhattan Club in the western half of the Park Central Hotel on Seventh Avenue and West 56th Street, opened in 1997. It was followed in December 2002 by the Hilton Club on the top three floors of the New York Hilton.
"Everyone wants to invest in hotels and New York remains the top hotel investment market in the world," Mr. Gordon said. "The international investment community continues to actively pursue New York City hotels with recent transactions with Spanish, Italian , and Middle East investors."
This month, 960 Sixth Avenue LLC, an American subsidiary of the Statuto Group, a Milan-based company, will close on its purchase of the former Atlantic Bank Building in the Herald Square area, currently owned by New York Community Bancorp. The price of the 16-story, 99,000-square-foot building is $105 million, or $1,060 a square foot. According to the trade, the new owner plans to convert the property into a hotel.
Directly adjacent to this building is the former ICON parking lot, off Sixth Avenue on West 35th Street. Earlier this year, the property was purchased by a joint venture between Israel-based Brack Capital Real Estate and Westbrook Partners. The joint venture has demolished the building to make way for a luxury hotel. And, as I reported last week, Skyline Developers is in contract to purchase an office building a little farther uptown, at 1040 Sixth Ave., as well as two adjacent buildings, and their development rights. It is paying $170 million for the 24-story, 256,000-square-foot building. The new owner is considering a residential development or a boutique hotel.
The New York Sun has also learned that an investment broker is marketing the 665-room Sheraton Manhattan at 790 Seventh Ave., at West 51st Street. In addition to its excellent location, the property could offer investors excellent retail and a major parking garage. Industry leaders expect the property to trade for close to $850,000 a room. Also in Times Square, trade sources have confirmed to the Sun that two major development sites are in play for possible hotel or residential mixed-use developments.
Some real estate leaders are concerned about the number of developments, locations, and developers, as well as the financing of upcoming projects.
"The key thing about the boom in hotel construction and revenue is that ‘location' will matter in the near future if the economy slows down or the dollars get stronger and foreign tourists level off in the city," the president of the City Investment Fund, Thomas Lydon, said. "A good number of the hotels under construction are not in prime locations, and have brands which are unproven in the New York marketplace. Some will work, but others will flounder when a competitive market is the name of the game. That being said, full-service, recognizable brands are not being built in any quantity, so this sector has a good chance of outperforming the overall market over the next three to five years."
If there are any concerns for hotel development, they are driven by project financing and the development team responsible for the project, Mr. Anderson said. "Until the last two months, leverage on new supply has been increasing due to an overabundance of liquidity throughout the capital stack, with mezzanine financing particularly available," he said.
Inexperienced new money sources have entered the market, from foreign and/or non-hotel investors with limited hotel-investing experience in America, and lenders without hotel construction lending experience. The concern is that hotels are operating businesses as well as real estate plays. There is no doubt supply is badly needed, but the quality of the execution, both on the hotel development and ramp-up financing side, will need to be closely monitored.
A principal at Thompson Hotels, Michael Pomeranc, said, "The industry is inviting players who will get into trouble. Financial projections are being massaged to show numbers that inexperienced lenders want to see by reducing the lending leverage. Inexperienced operators are also borrowing more expensive money."
"Certain deals will eventually falter when the market doesn't grow as fast as anticipated," Mr. Pomeranc warned, noting that "bars and restaurants are struggling in these properties because they are ill-planned and not attracting spenders unless these places become super hot."
Overheated construction costs also add to woes of ill-planned projects by increasing room costs; players are retaliating by cutting room sizes, he continued. "It's no wonder that larger established hotels are most profitable these days," he said. "The best upscale brands, coupled with experienced and careful planning, will continue to raise the bar, especially in the very upscale ‘cool' market. Luxury brands with strong recognition and reputation will steadily grow."
So the future looks very bright for the New York hospitality industry in the near term. One must concur with the chief operating officer of Citi Habitats, Gary Malin, when he says, "With a strong New York City economy and an expected rise in demand, especially from tourism, it's clear the demand for rooms will continue to exceed supply."
A contributing editor to The New York Sun, Mr. Stoler is a television and radio broadcaster, and a senior principal at a real estate investment fund. He can be reached at [email protected].