Hospitality: State of New York City Hotel Market
We are presently witnessing the longest uninterrupted economic growth in modern history, with the hotel industry now 114 months into an expansion cycle. There are growing concerns of geopolitical issues and the risk of impending recession, though New York is still largely considered the center of the universe for the hotel sector. According to the third quarter construction pipeline trend report published by Lodging Econometrics (LE), the city has the second biggest pipeline of hotel construction projects behind Los Angeles.
Growth has been 3-4% year over year since 2012 with continual demand fueling new projects. The Javits Center is finally expanding, while projects like One Vanderbilt and Hudson Yards expected to push corporate hotel business even higher. The impact of these demand generators is why Midtown West (everything west of 8th Ave.), has seen the largest supply growth in the last 4-5 years.
While these numbers appear positive, the consecutive years of sector growth amounting to the longest run in history is in question. Manhattan cap rates are all sub 5% and between $450,000 to $550,000 per key for actual trades taking place. Most hotel operators are finding better value in the boroughs, allowing them to achieve similar net operating incomes or cash flows with lower key costs. That holds true even more so for those who have developed ground up. This cost/benefit analysis has enabled Harlem to get its first full-service hotel, The Renaissance, opening in 2020.
Supply & Demand Dynamics
The long fear of oversupply has always haunted the New York City market. Over the past decade years, room supply has been catching up with increasing demand. As supply and demand reach equilibrium, as evidenced by steady occupancy rates and flat RevPAR, hotel development should slow down. It’s a legitimate concern, as supply has risen and will continue to do so well into 2023. There’s no turning back from the 155 projects with 26,605 keys under construction, nor the ability to erase the 50,000 Airbnb rentals looming in the shadows. Developers are set to open 61 new hotels with 8,283 rooms to the New York City market in 2020 as the sector continues to experience a construction boom.
Though the mayor’s office is restricting their growth after inking a deal with Airbnb this August to disclose all units listed in the city, it’s unlikely that inventory will just go away. The citizens of Jersey City have voted to restrict alternative housing apps, despite the $20 million campaign Airbnb launched. The changes in the zoning laws requiring special permits to build in the M zones will stymie new development by adding time and red tape before doors can be opened. But there are still 67 million tourists expected in New York in 2020… where will they all stay?
The dynamics of travelers is also changing, with newer trends and patterns emerging. Corporate travel is not what it used to be even less than a decade ago. In the past few years we have seen business trips shorten to two to three nights, typically Tuesday to Thursday. That translates to two days less of corporate business that most operators relied on. The trend of frequent guest programs is also keeping the pressure on maintaining occupancy rates high.
2019 ADR Levels in NYC
New York is the highest in the country when it comes to occupancy levels, averaging 85% for 2019. The bigger push in the hotel market these days is all about ADR (average daily rate). The boroughs are competing for their share of the pie and the dynamics are changing. Brooklyn emerged as a strong contender with untouched ADR’s and no signs of a negative downturn. Long Island City is struggling with oversaturation, though it has drawn some price sensitive clientele away from Manhattan due to its close proximity. Hotel owners are complaining of dropping rates across the board, and the overall average ADR has decreased by -0.5%. However, the average ADR has actually ticked up from 2.5% to 3.5% in the outer boroughs according to a study done by STR for Hotel Association of NYC. The numbers break down as follows:
- Bronx: up by 3.3% at $168;
- Queens: up by 3.5% to $167;
- Brooklyn: up by 2.5% to $196;
- Staten Island: up by 2.9% to $143;
- Manhattan: down -0.7% to $275.
Most guest programs don’t reimburse hotel operators the full ADR unless they achieve their occupancy targets. If they don’t have high occupancy rates, they only get reimbursed the cleaning costs of the rooms. This paradox is where the internet comes in: Websites and aggregating apps such as Hotel Tonight thrive on this specific objective. It is now more appealing for hotel owners to recoup revenue by offering unsold room inventory at a discount through such portals, or as blind deals to keep their occupancy rates high.
The Airbnb Effect
Airbnb is the most anticipated IPO of the decade, however New York is presenting a chink in the armor. It is the largest market, with a total of 50,000 units. Out of these units 25,000 are “entire place” as opposed to “just rooms.” However the key point to note is the impact of Airbnb has only been on the leisure segment, while the corporate business seems unfazed. Be it corporate or leisure, we will never truly know the impact because it is very hard to quantify given the lack of data transparency. The inventory on Airbnb is also very inconsistent, as many homeowners use it part-time to make additional income on long weekends, event days, or holidays. There was a sudden spike in the inventory during the New York City Marathon, which went off the website shortly after. The city is attempting to curb this through a deal signed with Airbnb allowing transparency and data sharing of all listings that are “entire place.” The aim there is to mainly target landlords of multifamily buildings through the Mayor’s Office of Special Enforcement. Nonetheless when it comes to hotels the impact is expected to decrease. There is legislation passed in multiple markets imposing stricter restrictions for alternative accommodations. This should drive incremental hotel room stays.
Outlook for 2020
It is forecasted that ADR will decline well into 2021. Interestingly, 2021 is the same year that RPAR (revenue per available room) will start to show signs of recovery. With historically low interest rates, the sector is flush with various debt products to choose from. Lower borrowing costs are providing a strong impetus for refinancing owned assets and returning equity. With the lack of creditworthy tenancies and room rates repeatedly being reset, hotels are fundamentally a long-term investment. At any point in the economic cycle, savvy investors in the hotel space tend to realize healthy returns paying market prices predicated upon underwriting (not necessarily holding) a minimum ten-year period.
With other asset classes losing their luster, the effects of alternative accommodation going down, continued demand growth generators, and laws curbing further supply, we may in fact see further resilience in 2020. Supply and demand dynamics (i.e. a serious lack of for sale product), could also drive an uptick in value.
Anudeep Gosal is an associate, investment sales at Besen Partners, Hotel Advisory Group, New York, N.Y.
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