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Big Apple Boom

Published: 01/04/2015 - Filed under: Home » Archive » 2015 » April 2015 » Special Reports » Home » Features »

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It didn’t seem surprising when Chinese insurance companies recently purchased the iconic Waldorf-Astoria Hotel in New York for $1.95 billion and the as-yet unopened Baccarat Hotel in the same city for a record breaking $2 million per room.

Every hotel brand and investor wants to be in New York. IHG, the mega-franchisor, is opening no fewer than three of its new Even hotels in the city in the coming months; and that is only one of the new brands coming to town, including the much anticipated Virgin Hotels, a Riu hotel, and the new Tommie boutique brand from the Commune Hotels group. 

In fact, more than 100 properties are planned and in construction so that by the middle of 2017 New York could have 118,000 rooms, making it among the most dynamic lodging markets in the country.

At the same time, massive renovations are underway in legendary hotels like the InterContinental Barclay and newer hotels like the Marriott New York at the Brooklyn Bridge.

Meanwhile the city has ridden a euphoric wave of years-long soaring rates and growing occupancies fueled in large part by tourism and especially international tourism – as more than 55 million tourists arrived in 2014.

With all that, hoteliers already in place are concerned as soft spots appear on the Big Apple hotel market – attributed to the explosion in supply; a weakening of the Euro damaging the all-important European market; and the growth of residence-sharing services like Airbnb.

Last year, according to Jan Freitag, senior vice president, strategic development for STR, the industry statisticians, average daily rates increased “only 1.8 percent” and the most recent pipeline counts 13,000 rooms under construction. Freitag says that whereas New York used to be a full service hotel location, it is rapidly morphing toward more limited service lodging (no restaurant, limited meeting space) “as upscale hotels saw a fairly serious decline in rate in 2014.”

And while occupancies are high, Freitag believes that is partly because of New York’s strong hotel unions enforcing policies that result in general managers preferring to see rooms occupied because the workforce will show up no matter what. 

Still, the city’s fundamentals remain strong and the hotels keep coming – and they are opening across New York’s five boroughs with Brooklyn having become a self-contained hotel market. Tom Baker, managing director of Savills Studley, a real estate firm, says, “Until the major players feel they’re represented in Brooklyn they will keep coming; you don’t want to be left out if you’re a brand.”

Even those who have not placed a stake in the New York market want to be here. Alex Cabanas, CEO of Benchmark Hotels & Resorts, says, “New York City is just a great place to be for the long term. So many brands start and grow here, but it’s a question of real estate. You can’t just show up and say we want to build. But we’ll get there.”

The threats to the strength of the city’s hotel market are perceived differently by different hoteliers depending on their product. Adele Gutman, vice president, sales, marketing and revenue for The Library Hotel Group, which thrives on international tourism, is not too worried about the supply but adds, “What we’re feeling is the currency exchange; we are a little bit less of a bargain.”

Tom Lorenzo, vice president & managing director development – Canada and Northeast US for Hilton, says, “The market is experiencing significant pressure hindering performance from factors such as supply influx and foreign currency weakness. However, our hotels continue to show strength with high occupancies and rates.”

Even those visitors who do come may not stay as long, says Andrew Bodziak, area managing director for Starwood, who explains “we could see travelers from markets where the dollar has appreciated shorten their stays or spend less on hotel rooms.”

And January and February of this year were off substantially, according to Vijay Dandapani, president of Apple Core hotels, who has five limited service hotels in central Manhattan locations and is currently chairman of the Hotel Association of New York City. He attributes the slump partly to bad weather and partly because year-over-year comps were skewed by the 2014 Super Bowl in the New York region.

The supply increase brings “obvious challenges,” says Mark Pardue, general manager of the Grand Hyatt at Grand Central Terminal, adding, “All players must look at innovation and customer preference and loyalty to outpace the competition. “ 

Who’s Building What Where?

With all those current issues, veteran players in the New York hotel game are looking to the long term and continuing to expand, according to Sean Hennessey, CEO of Lodging Advisors – long-time Big Apple hoteliers such as Sam Chang, who has completed about 60 hotels in the city, mostly midrate, and John Lam, who has completed more than 30 hotels, including a number of upscale locations. 

And, says Hennessey, national players with limited experience in New York have projects underway. They include Felcor Lodging Trust, Stonebridge Companies and others. Hennessey says some are building to jump-start brands – like Marriott Edition, 1 Hotels (from longtime investor Barry Sternlicht) and Baccarat. And experienced real estate developers are dabbling in hotels – like Zeckendorf Realty, The Related Companies and many smaller ones. 

They are all enticed, says Hennessey, “by the strong fundamentals.“ However, he adds, “they continue to shy away from true full service hotels with ample meeting space and stand-alone luxury hotels (without residential units). All new luxury hotels (Baccarat, Four Seasons, Park Hyatt) serve the primary purpose of occupying the lower floors of a tall tower, providing the residential apartments above with better views and higher prices.”

Another much anticipated luxury hotel is the recently opened The Knickerbocker which has possibly the most high-profile location in town at 42nd Street and Broadway. Originally opened as a hotel by John Jacob Astor IV in 1906 it served as a nondescript office building for many years before being returned to its former glory after a $250 million overhaul. Now it offers amenities such as one-touch, in-room tablets that control lighting and temperature, Ted Gibson beauty amenities; and food and beverage outlets from celebrity chef Charlie Palmer. 

Jeff David, The Knickerbocker’s managing director, says business travelers “ will now have the option of staying in midtown Manhattan close to many business locations at a luxury independent hotel that provides creature comforts previously unseen in the surrounding neighborhoods.”

Many millions ($175 million in fact) are also being spent on the redo of the InterContinental Barclay that will reposition the hotel at the very top of the market. The hotel was closed for 18 months and will reopen later this year.

Despite those investments in luxury, Hennessey agrees that much of the development has been along the select service model. “Sizeable feasibility obstacles still argue against the full-service Marriott/Hyatt/Westin/Hilton model in most situations,” he explains. “But some developers I speak with are starting to consider full-service, so it may be something we see entering the pipeline.“

“The easiest business model to make money on is in the limited service hotel segment,” says Marc Magazine, executive managing director of Savills Studley,  “because you don’t need a restaurant or can lease one to a third party.”

In fact, Starwood is adding ten new select service hotels in the next two years for its Aloft, Four Points by Sheraton and Element brands – including entry into Queens.  

Manhattan and Beyond

And while there is building all over the city, Joel Eisemann, chief development officer for IHG, says, “New York isn’t one specific market. Lower Manhattan and the Financial District are very different from Times Square and the East Side. Times Square will have more weekend business while the Financial District will have comparatively less.”

Lorenzo says that Hilton is being “strategic and selective” in its New York growth, including strong activity in Brooklyn and Queens. He says a Homewood Suites opened in midtown Manhattan despite the fact that “all-suites hotels are challenging in New York because of the crush on room size.” 

Sam Ibrahim, general manager of the Marriott New York at Brooklyn Bridge, says, “When we opened in 1998 we depended on business from Manhattan companies, but that is no longer the case. And that is why we are undergoing a $43 million renovation which will see a redo of all rooms and a new lobby. We don’t need demand from Manhattan any more. Brooklyn is no longer a second choice for a business trip or convention. We have corporate centers like MetroTech and the Tech Triangle, Barclays Center and many office buildings.” 

The proliferation of Brooklyn hotels is a mixed blessing, says Ibrahim. He is happy to have thousands of nearby rooms because it helps attract larger conventions. However, he says, “there is too much supply coming on in the city as a whole and corporate business is down “ 

The Sharing Shadow 

“Nobody is quantifying Airbnb,” says Cabanas. He says that without knowing the effect on demand of Airbnb, “we don’t know what the industry is losing. Some say they’re not competition, but there’s no doubt there are people who stay with Airbnb and other sharing companies who would otherwise stay in a hotel.”

“The proverbial elephant in the room is Airbnb and other sharing services like HomeAway,” agrees Dandapani. “They have a stealth inventory that is very large – as many as 45,000 listings, depending on who you talk to.“

As many frequent visitors can attest, occupancy has remained near capacity. However, as Hennessey says, so much new supply is reducing compression and the ability of hoteliers to raise rates. New York now has nearly the slowest average daily rate growth of any major US city and this will continue while the surge of new hotels is absorbed.

And there will be more hotels targeting business travelers far from midtown Manhattan. “Business people are doing business all over the city,” Baker points out. “As long as you have easy access to the subway you will see commercial travelers in that hotel.”

What’s tough on hoteliers is good for travelers, says Pardue, who notes, “Inventory is more diverse in terms of price points and experiences, which will help attract a wider group of travelers to the city, and keep demand strong.” 

And Lorenzo says, “Lower rates benefit business travelers who previously had to pay dramatically high rates to get a room in New York or leave the market to find more affordable options.”

Outlook: Solid But Challenged

New York will continue to see strong demand in relation to inventory for the next 18 to 24 months, according to Magazine. “But with all the inventory coming on the market, especially from Times Square south, there might be a point where inventory outpaces demand by the end of 2016 or so.”

“The surge is starting to ebb somewhat,” says Hennessey, “because land and construction costs have escalated dramatically over the past 18 months and that, together with slowing rate growth is reducing the number of ‘slam-dunk’ development deals.”

“Supply will correct itself a bit,” says Dandapani. “Lenders are now becoming aware of the situation and will begin to factor that in when considering loans.”

“The outlook for the city is still very strong,” says Lorenzo. “You are seeing record pricing when hotel assets are trading and I am just not certain that all the proposed supply will get built.”

And Bodziak says that if rates continue to flatten, “we could see more conversion of hotel inventory to residential, as was just announced at the Waldorf.” (Tentative plans call for conversion of part of the Waldorf to condos.)

Even with all the pressures on rates, Freitag concludes, “I have said publicly that I would never bet against New York City.” 

By Harvey Chipkin

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