New York City and its Manhattan submarket could rebound sooner than expected with the amount of foreign capital coming in and a steady supply pipeline.
REPORT FROM THE U.S.—New York City has been in the news throughout 2016, with talk of decelerating revenue per available room, adverse supply growth and, of course, the ever-growing buzz of Airbnb.
It’s possible the city that never sleeps may absorb the new supply and have a rebound sooner than we think. But what if the downward performance trend continues demand slows and supply increases even more? Will demand continue to grow?
The Horwath HTL NYC 2016 midyear market update may surprise you.
Overview of the New York market
In New York, strong supply growth continued during the first half of 2016, outpacing demand growth, which contributed to the decline in RevPAR. New developments have focused on independent and upscale sectors, which have already reached over half of the market share.
The average price per unit in the Manhattan market decreased and the average cap rate was 5.43% at the end of the second quarter of 2016. Cross-border investments are major forces in Manhattan, and represent 72% of the capital flows. By the end of 2016, occupancy declines are expected to slow down, which will drive up average daily rate and RevPAR.
New York’s key performance indexes, including occupancy, ADR, and RevPAR, showed rapid growth from 2010 to 2014, but declines for the past two years based on the June YTD 2016 data. Occupancy decreased to 83.7% in 2015 and remained flat in 2016, while ADR dropped to $254.72, which resulted in a decline in RevPAR to $213.60 by the end of Q2 2016.
According to STR, as of the end of Q2 2016, there were 410 hotels in Manhattan with a total of 93,616 rooms. Economy and midscale hotels have the smallest presence in Manhattan market. Independent and upper-upscale hotels have led supply, representing a combined 60.5% of the market, followed by upscale and luxury brands.
Overall, supply and demand have been growing for the past six years. However, while the growth of supply has been booming in recent years, demand growth has been slowing down year by year.
The average price per unit for hotel transactions has been flat during the past four years in the U.Ss. The average PPU in Manhattan has been much higher than the national average for the past four years.
Since the first quarter of 2016, there has been a decreasing trend in the average PPU in Manhattan and the United States, with a higher decline rate in Manhattan compared to the national average. This trend indicates a cooling down of buyers’ activities after all the big transactions made by foreign groups, which boosted the selling price in 2015.
In the last 12 months, there were 35 hotel transactions at an average cap rate of 5.43% in Manhattan; meanwhile, nationwide there were 1,760 transactions at an average cap rate of 8.47%.
According to the chart below, the national average cap rate has been increasing in recent years, while the cap rate in Manhattan has been slightly decreasing year by year, with a drop in Q4 2015 potentially due to some big foreign transactions in Manhattan.
In general, the cap rate in Manhattan is lower than the national average, which indicates that the sales price in Manhattan transaction market has been exceeding the national average price for the past four years.
Major capital flow in Manhattan’s hotel market for the past four years has come from cross-border groups, institutional groups, publicly listed companies, real estate investment trusts and private groups.
There has been an increasing trend of foreign investment in Manhattan. Conversely, the investment interests of REITs and publicly listed companies have been declining while the institutional and private investment activities have remained steady.
These investment activities indicate a trend of cross-border capital flows, with Anbang (China-based), Lotte Group (South Korea) and ADIA (United Arab Emirates) are based outside of the U.S. and are investing in Manhattan hotels.
The top five sellers in the Manhattan market in the past two years were Hilton Worldwide Holdings, Blackstone, Northwood Investors, Highgate Holdings and Goldman Sachs. Among the list of transactions, the top 20 sellers are U.S. based companies, which shows an opposite trend regarding capital inflows.
The declines in occupancy, ADR and RevPAR seen over the span of the past three years are expected to slow down by the end of 2016. ADR will come back in 2017 with a projected growth rate of 1.7%, along with the relatively small change in occupancy decline, and 2017 RevPAR will increase by 0.7% compared to 2016.
Julia Zhang is an analyst at the Atlanta office of Horwath HTL. Zhang is currently pursuing her bachelor’s degree in Hotel and Restaurant Management at Cornell University, School of Hotel Administration, with a minor in Real Estate. She joined the Horwath HTL Internship Program in June 2016. Julia has extensive work experience in hotel operations and knowledge of hotel development, market research & analysis.
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