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While Occupancy Skyrockets, NYC Hotel Players See Cause for Concern

Over the past several years, the unofficial motto of the New York City hotel market has been “If you build it, they will come.” The city has seen tens of thousands of new hotel rooms crop up across the city this decade, and there are tens of thousands more in the pipeline due to arrive in the coming years—but despite all that new supply, the rooms keep getting absorbed.

That’s undoubtedly good news for the hotel developers and operators who built those new rooms and plan on bringing more to the market in the near future. But a closer look at the statistics and conversations with hotel market participants reveal a more mixed view of the city’s hotel landscape—one that finds it attempting to strike a balance between the number of rooms sold and the prices being paid for those rooms, and bracing for a variety of headwinds that could make it hard to sustain future development.

The clear, undoubtedly positive story is that while the U.S. hotel industry has struggled recently—with declining tourism figures among the factors that have made it difficult to absorb the roughly 2 percent supply growth experienced nationally last year—New York City has shown little problem handling the 4 percent growth in its supply that it saw in 2017. As Jan Freitag, the senior vice president of lodging insights for data and analytics firm STR, put it, the city’s hotel market is experiencing a dynamic that “doesn’t make sense in any other market but does make sense in New York City.”

The average occupancy of New York hotels in 2017 stood at 86.7 percent, up 1.1 percent from the previous year—with the city now home to more than 119,000 hotel rooms across the five boroughs, according to STR. That 86.7 percent occupancy rate means that nearly nine out of 10 hotel rooms available in the city were sold out through the course of last year—a “stunning” figure given the added supply, Freitag said.

“What demonstrates the strength of the New York market is that all of those hotel rooms are being absorbed in the year that they open,” said Mark VanStekelenburg, a managing director in the hotels division at CBRE. “From an occupancy standpoint, the market is at or near its peak occupancy and is continuing to be, even while we’re experiencing 4 to 6 percent [annual] supply growth. We’ve never really seen something like that in the U.S.”

That should give confidence to the city’s hotel developers, given that room supply will only continue to grow in the next few years; STR tracks more than 22,000 new rooms presently in the city’s development pipeline, including nearly 12,000 that are presently under construction.

But while the city has shown an ability to absorb that kind of supply influx, the underlying economics of doing so—such as the daily rates those rooms are able to command and the revenues flowing into the pockets of hoteliers—are somewhat murkier.

Though hotel occupancy in New York has been on an upward trajectory, average daily rates have not; those slipped 1.4 percent to $255.54 in 2017, according to STR. Room rates in the city have continued to slide since peaking at more than $271 per night in 2014, as has the metric of revenue per available room (RevPAR), which has fallen 4.6 percent to $221.60 in that time.

Market observers attribute this inability to translate high occupancy rates to improved room rates and revenues to a number of factors. Some noted that most of the city’s new hotel rooms fall under the booming limited- or select-service category, where rates are on the lower end of the spectrum (such rooms comprise more than 6,000 of the nearly 12,000 rooms currently under construction in the city, per STR). Others cited the influence of Airbnb, which has forced hoteliers to re-evaluate the prices they ask of consumers who can now choose a cheaper, often more spacious lodging alternative.

Still, despite softening rates and the promise of even more supply to come, it’s not hard to find real estate players willing to bet on the hotel market’s continued viability.

“You can see from our commitment to the city hotel market that we’re still very bullish in our long-term view of hospitality investments,” Mitchell Hochberg, the president of the Lightstone Group, said.

Hochberg pointed to his development firm’s hotel projects around the city, such as its Moxy brand hotels in Times Square, NoMad and the East Village, as examples of Lightstone’s continued faith in the hotel sector. “New York is one of the strongest economies in the country, and it’s a global center for finance and media,” he said. “Although there’s been a supply increase in the last couple of years, the data indicates that demand has kept up with supply.”

1713 pod twin 026 While Occupancy Skyrockets, NYC Hotel Players See Cause for Concern
Guest room at the Pod Times Square Hotel. Photo: The Pod Hotels

But other hotel market players are far less convinced. Richard Born, the co-founder of BD Hotels and the hotelier behind boutique Manhattan brands such as the Mercer Hotel, the Greenwich Hotel, the Ludlow Hotel and the Jane Hotel, espoused his view that, “with some exceptions, by and large the hotel market in New York is terrible.”

He cited a combination of factors including the “erosion” of daily rates (which he attributed to the influx in room supply as well as Airbnb’s vast “shadow inventory”), higher property taxes and operating costs, and the increased influence of third-party booking websites like Expedia and Travelocity (which have brought more transparency and reduced hotels’ “pricing power” while also charging booking commissions that are an additional “line item” for operators).

“Any hotel operator operating today is making a fraction of their net operating income compared to what they were making 10 years ago,” Born said. He added that the operators best positioned to succeed in such a challenging market are the ones capable of differentiating themselves from the more malleable product of their competitors. “There’s a fungibility to the hotel market that makes pricing very difficult because everyone is looking at everyone else’s rates. But the exceptions are the hotels that are not fungible—the ones that are unique, designed and have something different to offer their customers.”

In addition to its higher-end boutique brands like the Mercer, Bowery, Ludlow and Maritime hotels—where rates are on the higher end of the pricing spectrum—BD Hotels has sought to differentiate itself from the landscape with projects like its Pod hotels, which have parlayed the micro-apartment trend into a concept the hotelier terms the “micro-hotel.” With four locations in New York and one in Washington, D.C., the Pod hotels offer nightly rooms of around 100 square feet but also come equipped with food-and-beverage concepts and boutique-minded aesthetics (such as the mural from Brooklyn artist JM Rizzi that adorns the elevator shaft at the recently opened Pod Times Square).

Born pointed to the Pod BK—the brand’s Williamsburg, Brooklyn location—as offering something specifically different from the new luxury hotels that have cropped up in that neighborhood in recent years, such as the Wythe Hotel and the William Vale. “We have a hotel that we don’t think is fungible, in a marketplace where all the hotels are four-star boutiques looking for high rates,” he said.

Hochberg cited a similar rationale behind Lightstone’s Moxy brand; the developer teamed up with Marriott International with the goal of “delivering an affordable product with a lifestyle component to it”—one that offers the sensibilities of a boutique product at a lower price point with smaller rooms and limited-service offerings.

“The industry has introduced many more products and choices for the consumer of the past few years,” Hochberg said. “There’s a whole variety of new genres and brands that are focusing more on the consumer and trying to understand what today’s consumer is looking for.”

Hoteliers may also receive a boost from the fact that, beyond this decade, the city’s hotel development pipeline is slated to slow down significantly, making it easier for the incoming supply to be absorbed and potentially driving up room rates again.

Multiple market observers and participants noted that the supply influx the city is now seeing is the result of plans initiated a few years ago, adding that a variety of factors—from risk-averse lenders shying away from financing new projects to regulatory pressures being placed on the hotel sector by the de Blasio administration—could slow future development significantly.

“When we go out to find financing, there are less people able to provide debt than there were before,” said Eastern Consolidated’s Adam Hakim, a managing director in the brokerage’s capital advisory division. “Lenders control supply and demand; when they give hotel developers money, people build hotels, and when they don’t, they can’t.”

Hakim’s colleague James Murad, a director at Eastern, described the hotel market as “one of the thinnest construction financing markets you can go out for” to procure funds, with lenders mindful about the sheer volume of new supply and how that may affect borrowers’ abilities to refinance in the future.

“That said,” Murad added, “for quality sponsors and the right product, there’s appetite.”

wythe guestroom 4 credit matthew williams While Occupancy Skyrockets, NYC Hotel Players See Cause for Concern
Guest room at the Wythe Hotel in Williamsburg. Photo: Matthew Williams

Jared Kelso, a senior managing director in  Cushman & Wakefield’s global hospitality group, echoed that sentiment. “The last 24 months have been very challenging to find construction financing [for hotels],” he said, attributing the slowdown to lenders being in a “checklist underwriting” mind frame in considering hotel market fundamentals.

But Kelso added that financing is still available to “sponsors with a long and proven track record” with debt funds and alternative lenders also stepping in to fill the void left by the more risk-averse banks. He also noted that the tightening of the financing market is “frustrating for developers but not a bad thing at large” given the impact it will have on restricting supply. “After 2018, the supply pipeline thins dramatically, and that will ultimately be a good thing for the [hotel market] at large.”

And then there are regulatory obstacles that market observers say will impede hotel development in the future. That includes the de Blasio administration’s proposal to limit projects in industrially zoned M1 manufacturing districts by requiring developers to obtain a special permit, as well as the extension of Local Law 50, which prohibits large hotels (150 keys or more) from converting more than a fifth of their rooms to residential units or other non-hotel uses without city approval.

Both measures are perceived by many observers as meant to preserve the interests of the influential hotel workers’ unions and potentially damage the city’s future hotel supply. In the case of the zoning proposal, it will make it harder for developers to find parcels to build on and likely subject those projects receiving a special permit to higher-cost union labor requirements; in the case of Local Law 50, its preservation of existing hotel rooms would dampen the need for new supply in the interest of preserving existing hotel jobs.

According to Hakim, some of the developers behind the current supply pipeline—such as prolific hotel builder Sam Chang of McSam Hotel Group, a client of Eastern’s—are operating on the “thesis that hotel values are going to go up significantly in the next few years. The inventory is going to stabilize, and once it stabilizes, the theory is that you won’t be able to build new ones.” (Chang did not return a request for comment.)

“Twenty-four months from today, in 2020, I think your pipeline of hotels is going to drop to pretty close to zero,” Hakim added. “From there, you’ll see an increase in [room] prices.” But he was also critical of the influence that the current regulatory environment has had on exacerbating this dynamic. “I believe markets should correct themselves properly; you have a lack of [financing], and that’s a correction you’re seeing. But public policy and zoning laws being arbitrarily changed—that’s not how it should work.”

The de Blasio administration, for its part, does not think the proposed zoning regulations will negatively impact the flow of new hotel projects in the city. “We don’t believe the proposed rules will hinder hotel development across the city, which remains strong,” a mayoral spokeswoman said in a statement. “But we do aim to prioritize manufacturing businesses in the zones specifically designated for manufacturing. While hotels have a lot of options for where they can open and operate, these industrial firms don’t.”

The impact of all these various influences could start making themselves felt sooner rather than later, sources said. C&W’s Kelso said that the brokerage believes New York City room rates could start ticking upward as soon as the fourth quarter of this year, while Hochberg said Lightstone projects RevPAR “to be flat to slightly increased in 2018.”

That would be good news for hotel operators in the city—and a testament to its voracious appetite for hotels. Despite all the new supply, the city’s churning economy and robust tourism sector seems to always make room for even more places where people can stay.

“It’s a cultural mecca for the world,” Born said. “Every 14-year-old lives on a handheld device, looking at all this and dreaming of coming to New York, whether you’re in Oklahoma or Bangladesh, to live, work, study and visit here. It’s always going to be a dynamic place for tourism—the issues are going to be the costs of operating and the supply. But we do live in the greatest tourism market in the U.S. and in the world.”

Source: commercial

Surging Economy, Lack of International Travel Could Hamper Hotel Sector

The United States economy is as robust as it’s been in decades.

The Bureau of Labor Statistics reported last week that the country added 200,000 jobs in January, which exceeded expectations and marked 88 straight months of job growth; the unemployment rate has remained steady at 4.1 percent for the last four months—its lowest level in 17 years; average hourly wages for private sector workers climbed 2.9 percent on the year—the strongest year-over-year shift since June 2009—and 0.2 percent from the previous month.

Historically, a strong economy has spurred strong travel and tourism numbers that boost the hospitality real estate sector—led by domestic travel and buoyed by international travel, which has been a mainstay export for the U.S. for years.

For the last two years, however, the trajectory of international travel has dipped significantly, and the U.S.’ current economic standing, coupled with its turbulent political environment, has some hospitality industry professionals and economists noticing some fractures that could negatively impact the sector.

“International tourism is definitely down,” said Chris Muoio, a senior quantitative strategist at real estate research firm Ten-X. “It’s affecting select, gateway markets disproportionately, and it’s really coming at a time when these markets have seen large expansions in supply. It’s not drastic right now, but it’s definitely having an effect.”

The U.S.’s total market share of long-haul travel fell to 11.9 percent last year, down from 12.9 percent in 2016 and from 13.6 percent in 2015, according to the U.S. Travel Association. The U.S. was joined only by Turkey—a country currently in political turmoil, having faced a military coup on July 15, 2016—as the only two countries out of the world’s top 12 destinations to have seen a significant drop in inbound international travel over the last two years—Turkey (6.7 percent) and the U.S. (6 percent). In comparison, Saudi Arabia saw its arrivals climb 20.3 percent from 2015 to 2017.

Nine of the U.S.’s top 10 source countries for international arrivals reported significant declines from 2015 to 2017—the only country whose travelers didn’t soften on the U.S. as a vacation destination was South Korea, which reported no change, according to data from the travel association. Had the U.S. maintained its market share of visitors, the hospitality sector would have had $32.3 billion in additional spending and 100,000 more jobs. In a separate report from the Commerce Department in early January, traveler spending fell 3.3 percent in 2017—through November 2017—equating to $4.6 billion in losses and 40,000 lost jobs.

“I think the damage is done,” Muoio said. “Even if the White House softens and changes its message, I think international travel sees right through it. As long as this administration is in place, I think there’s going to be a tepid, cooler response toward traveling to the U.S. It’s just become a less desirable destination based off the rhetoric and attitude that’s been put out there.”

Muoio added, “I don’t see tourism rebounding significantly unless [the U.S. dollar depreciates against other currencies]. It would honestly depend on whether [President Donald Trump] gets a second term. Four years of this attitude isn’t lasting, whereas a decade is more lasting. It’s definitely having a chilling effect on hospitality.”

Despite the losses in international travel, the hotel sector has remained steady for some time. Average daily room rates (ADR) have hit an all-time high—although it’s slowed considerably since 2014, according to data from research firm STR.

Revenue growth declined year-over-year in the first quarter of 2017 for the first time since 2010—although it was a small drop—caused by a slight dip in demand, stagnant occupancy levels and continued increases in hotel room supply across the U.S., according to an August 2017 report from Wells Fargo. Occupancy levels at a national level have been flat since 2014, hovering around 65 percent, and supply growth dipped, but the number of rooms still reached a record-high level in the second quarter of 2017, according to data from STR.

“In the last handful of months, we’ve signed up or executed on a few billion dollars in hotel deals,” said Dustin Stolly, the vice chair and co-head of Newmark Knight Frank’s debt and structured finance group for the New York tri-state region. “We’re seeing significant interest in financing hotel assets at all levels of the cycle, from fixed-rate assets that have stabilized cash flow to assets that have come out of renovations where lenders have gauged forward projections. Investors are definitely starting to look at hotels and be more active.”

In June 2017, STR reported it expected supply to outpace demand by 3 basis points on the year—3 to 2.7 percent—which could drive down room rates and create a cash flow issue should there be an economic downturn. Mike Barnello, the president and CEO of Bethesda, Maryland-based LaSalle Hotel Properties, told Commercial Real Estate Direct in June 2017, “When we get to this part of the cycle and we see the supply move up and continue to ramp and demand soften, that’s when we get more and more concerned.”

Demand from leisure travelers—heavily domestic—who book individually has climbed 37 percent while group bookings have seen tepid growth at 2 percent, according to a September 2017 U.S. lodging industry overview report from Cushman & Wakefield.

“Things are great right now, but back-to-back [down years for international travel] creates a concern that can be turned around,” said Chip Rogers, the CEO of the Asian American Hotel Owners Association. “We have a president who’s a hotelier. He could spread a message that America is open for business. International travel is the best and cleanest export that we have and creates and sustains many, many jobs in the U.S. If the message is the U.S. is the greatest place to visit, we would be very happy.”

That is exactly what Trump tried to say in front of a crowd of about 1,600 at the World Economic Forum in Davos, Switzerland, on Jan. 26, when he declared the U.S. is “open for business, and we are competitive once again,” touting the future of the U.S.’s energy and manufacturing exports. That assertion, however, doesn’t ring true in the hospitality sector.

Just a few days before the one-year anniversary of Trump’s inauguration, 10 business and trade associations—including the American Hotel and Lodging Association (AHLA), the Asian American Hotel Owners Association (AAHOA), the U.S. Travel Association as well as the U.S. Chamber of Commerce—created a travel industry group called the Visit U.S. Coalition that’s aimed at staving off and reversing the U.S.’s growing unpopularity as a tourist destination.

“We are certainly concerned about the statistics,” said Craig Kalkut, the vice president of government affairs at the AHLA, who added that his organization is also concerned about smaller hotels near national parks that could be affected by the loss of revenue from international travelers. “It’s important for the hotel industry but also the businesses that surround [and occupy] hotels and the economy overall, so it’s time to take some action. We want to head this off and turn things around as best we can. All these associations are nervous enough that they want to be involved. We want a more welcoming message for the world, and we want to turn things around.”

Some members of associations within the Visit U.S. Coalition acknowledged the negative impacts of certain policy initiatives and rhetoric from the Trump administration but also pointed to indicators such as the strong U.S. dollar as a main culprit for the downturn. The U.S. dollar is at its weakest point in almost two years, having fallen 0.07 points to 89.16 on the U.S. Dollar Currency Index as of Feb. 4—its lowest level since November 2014, after peaking from a high of 102.15 on March 3, 2017—although it still remains strong against foreign currencies.

“When we look at the last five to 10 years, international tourism has been a hockey puck,” said Patrick Denihan, a co-CEO of hotel developer Denihan Hospitality Group. “I would say that right now we have no concern [about the dip in international travel], but I do have a concern in the way the administration is dealing with immigration. Ten to 12 percent of our business is in the international market.”

Denihan added, “It would be nice if the current administration were taking a different position. How much stronger would it be? I don’t know. But, we always like to have more business if we can get it.”  

The tight labor market, coupled with potential wage accelerations for hotel service employees—who are typically on the lower end of the wage scale—as well as potential tax hurdles for some markets, could also have an affect on operating costs.

“If the health of the labor market shifts and wages stagnate or contract, hotel fundamentals are the first to turn because of consumer spending,” Muoio said. “I would say the downside risks are bigger than the upside risks in terms of hotel operating. If there’s a downturn shock, this current supply overhang becomes a larger problem.”

Major indexes have taken a step back after getting off to a fast start to kick off the year, hinting that volatility has risen as strong wage figures have created some concerns about a pickup in inflation and a subsequent tightening of monetary policy. Outgoing Federal Reserve Chair Janet Yellen went so far as to question commercial real estate prices on CBS’ Sunday Morning in an interview recorded on Feb. 2, saying asset prices in general are “quite high relative to rents. Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high.”

It remains to be seen what could come of the hospitality sector, should an economic downturn swing into effect and domestic tourism take a hit, but one thing holds true: International tourism will not be there to help pick up the slack.

“We think this a great time to reverse this [downward travel] trend. For the first time ever, we have a hotel owner as a president,” Rogers said. “He has the largest platform of communication in the world with the ability to champion travel. He knows what it means to put more heads in beds.”

Source: commercial

After Tepid Growth, Brooklyn Hotel Room Rates Spike

The Manhattan hotel market—one of the priciest hospitality markets in the country—has been strong this year, with hoteliers selling almost nine out of 10 rooms nightly for the first 11 months of this year. But that demand has not amounted to an increase in average daily rates, or ADR, according to new research from STR, a hotel data and analytics specialist.

Manhattan hoteliers have cut nightly room rates this year by 1.6 percent from 2016, to $269.45 (although the room rate is still higher than in any of the 25 largest markets in the U.S. tracked by STR). That is a continuation of the decline in room rates since 2014’s high of $292.46.

In nearby Brooklyn, however, room rates shot up a considerable 4.1 percent to $182.13 year-over-year, as supply surged 21.1 percent, occupancy rose 4.2 percent to 81.5 percent and the number of hotels rose from 61 to 71 today.

Manhattan “is getting very expensive with ADR and development costs and I think a lot of people are looking outside, right across the river,” said Jan Freitag, a senior vice president of lodging insights for STR. “There is very, very strong supply growth and even stronger demand.”

Brooklyn’s 4.1 percent ADR uptick is double the U.S. average percent change to date, and the year-over-year increase is much greater than the borough has seen over the last couple of years. Between 2015 and 2016, the ADR grew by 1.4 percent, and the year prior, it increased 1.3 percent.

Today, Brooklyn hoteliers have more “conviction” to increase their pricing, Freitag said. Brooklyn is now a destination in its own right, and between its proximity to Manhattan and its new product—with sweet amenities—hoteliers have reasons to justify higher prices. To stay at the William Vale Hotel in Williamsburg for one night in mid-January, for example, costs $279 plus taxes, the hotel website indicates.

“Brooklyn is super hot,” Freitag said. “Developers like it. Travelers like it. It has a great reputation and it’s very close to Manhattan.”

As perceptions about Queens and the Bronx have shifted, their room rates have climbed. In Queens, the ADR rose by 5.1 percent to $157.59 and in the Bronx it went up 4.7 percent to $157.19, STR data covering the first 11 months of the year indicate. The borough’s hotel count increased from 113 last November to 122 today, supply increased 7 percent and occupancy crept up 1.3 percent to 85.5 percent. Hotel room supply in the Bronx jumped 9.2 percent, the number of hotels increased from 22 to 24 today and occupancy ticked up .3 percent to 72.6 percent. (In Staten Island, where the number of hotels remained the same at nine and supply and demand remained flat, the ADR dropped .5 percent to $126.67.)

If the number of rooms sold in Manhattan has increased 3.7 percent for the first 11 months of 2017 from the same period last year and the number of hotels rose from 416 last November to 428 today, why isn’t pricing following suit?

“That’s the billion-dollar question,” Freitag said.

He offered five potential reasons, but noted, “The truth is somewhere in the middle”: 1) With so much supply coming online (up 2.7 percent from 2016 at the same point), hoteliers don’t feel comfortable being aggressive in their pricing, 2) the ADR is already high, and the average guest doesn’t want to pay beyond that, 3) new entrants aren’t pricing as strong because they want to achieve occupancy, in turn dragging down the overall market prices, 4) more limited-service hotels are being built, which brings down the price point, and 5) hoteliers focus on hitting 95 percent occupancy, which allows them to get reimbursed by the brand at the ADR rather than a low fixed rate when guests pay for rooms with loyalty points.

As in Manhattan, citywide occupancy has risen this year, but pricing hasn’t follow suit. Through November, New York City hotels saw an 86.5 percent occupancy rate, up 1.1 percent from the same period last year, according to STR figures. ADR was $251, down 1.4 percent year-over-year. And the number of rooms under construction in New York City dipped by 2,000 rooms to 12,000 less than last year at the same time, but that is not anything to be worried about, Freitag said.

The Big Apple’s pipeline is “the highest of any market in the U.S,” he said. “The number we tracked a year ago was a high-water mark for rooms under construction in any market that we track since 1990.”


Source: commercial