Experts say the New York hotel industry, which has been the subject of much derision of late, still has strong overall performance and could soon be poised for a rebound despite supply woes.
REPORT FROM THE U.S.—New York City has endured a period of derision among industry experts and analysts, but those familiar with the market believe some of the supply-driven concerns could be somewhat overblown and the city could be poised for a comeback.
Sean Hennessey, CEO of Lodging Advisors, noted the fundamentals of New York City hotels have remained strong even through this recent period of supply growth and pessimism, and the worries about the market are founded largely on the city’s history of abnormally strong growth.
“Despite all the new supply we’ve seen, New York continues to have capacity constraints,” he said. “Occupancy has been at 80% (for 11 of the past 12 years). The good news is we have no indication yet that we’ve had any difficulty finding customers around the world, but pricing has been the main factor (to suffer).”
Many lodging real estate investment trusts, which have historically coveted landmark assets in New York, have been open about their intentions to reduce their exposure in the market as it continued to fall short of investor expectations.
Greg Larson, EVP and CFO at Host Hotels & Resorts, noted the overall performance declines in the city during his company’s fourth-quarter and 2016 full-year earnings call.
“In New York, (revenue per available room) decreased 2.4% in the fourth quarter with an occupancy increase of 60 basis points and an average rate decline of 3.1%,” Larson said. “Supply continues to outpace demand, which when combined with lower European travel and tour business due to the strong U.S. dollar continued to negatively impact our operators' ability to drive rate. Based on our outlook for the market, we expect RevPAR at our hotels in New York to continue to decline in 2017.”
FelCor Lodging Trust’s ownership of three assets in the city has grown into a point of contention in fellow REIT Ashford Hospitality Trust’s public quest to buy FelCor. Ashford Trust officials have pointed to the purchase of those hotels as signs of FelCor officials’ incompetence, and FelCor executives have been public about their intentions to sell the three assets, including The Knickerbocker.
“We started marketing Morgans and Royalton in June of last year very broadly,” Troy Pentecost, FelCor’s president and COO, said during the company’s fourth-quarter earnings call. “We started probably marketing the Knickerbocker in September. Typically these things take time, 12 months to 16 months to conclude a sale.”
Ross Bierkan, CEO and president of RLJ Lodging Trust, said his company is already taking advantage of global interest in the city as an opportunity to sell assets.
“We took advantage of the strong interest from international investors looking to acquire real estate in New York by opportunistically selling two hotels at a very attractive valuation,” Bierkan said.
What’s next for the city
Hennessey noted that the city’s issues are more centered on the ability to drive rate than filling rooms.
“Pricing has been the main factor,” he said.
Hennessey added there are several issues beyond the supply woes, including:
- the strength of the U.S. dollar, which is driving many travelers to different destinations;
- the construction of more midscale supply in the city, which naturally drives down average rates for the market;
- more supply in boroughs outside of Manhattan where hotels typically charge less; and
- concerns about impacts from the sharing economy, which he noted is significantly less impactful than new hotel supply.
“My big-picture prediction is we’ll continue to see some choppiness in 2017 and finish the year pretty much where we started it,” he said.
A large part of that is tied to the high rate of supply growth seen in the city, but Hennessey said it’s important to not exaggerate that. He noted that the city has seen a spike in new supply, but at the same time has seen a corresponding—albeit slightly more muted—spike in demand. He expects a recovery, but not the type seen during the last few times the city saw a downturn.
“In the past few cycles, room rate growth was stunning, into double digits for years on end,” he said. “I don’t think we get back to those days.”
Hennessey said he’s also hopeful the city is approaching a point where supply growth could curtail, allowing the new supply to be absorbed. He noted that the availability of real estate and the current challenges in financing hotel projects will naturally curb the number of new projects.
“When we look at how quickly or how long it takes to achieve a stabilized level of occupancy, the typical mindset (for most markets) is a couple of years, but in New York it’s a couple of months,” he said. “I haven’t seen that ability deteriorate in the current cycle.”
According to February 2017 data from Hotel News Now’s parent company STR, New York has an existing supply of more than 116,000 rooms with 15,434 new rooms in 95 hotels under construction.
Anbang Insurance Group’s decision to take the Waldorf Astoria offline could be a bit of a salve for the city’s supply woes, since it takes more than 1,400 hotel rooms offline for the time being, and even when the property reopens, it will have a significantly smaller room count.
Hennessey said it’s interesting to see that property converting some rooms to luxury condos and it might be an indication of larger investor sentiment on residential versus hotels, but he doesn’t expect it to be a sweeping trend simply because there aren’t many candidates in the city to go through a similar conversion.
“Many hotels don’t have the floor-to-ceiling heights or windows or reputation that residential condo buyers want,” he said. “You can convert something like the Waldorf or the Plaza, but you can’t convert the Four Points Chelsea.”
Larry Kaminsky, EVP at Fulcrum Hospitality, said hoteliers need to be careful to not get overly fixated on New York’s supply.
The impact of new supply on New York “is hard to really tell and it’s hard to rely upon what you hear in terms of development projects,” he said. “A lot of projects either don’t happen or they do happen but get delayed. Supply is a factor, but you can’t get too focused on it. There is still a lot of demand for the city, and if you’re too focused on supply, you’re ignoring that fact.”
Both Hennessey and Kaminsky noted New York has something of a perception problem because of decades of remarkably strong performance. Kaminsky noted that the new normal for the city seems to be periods of extremely strong performance coupled with pockets of weakness, the latter of which New York hoteliers weren’t really accustomed to.
“It’s an ever-changing market, so you have to be dynamic in your approach to pricing and whether you go for an occupancy strategy or a rate strategy,” Kaminsky said. “Hotel operators and revenue managers have to take advantage of those pockets of strength when they have them.”
Kaminsky said some of the city’s pricing issues are self-inflicted because worries about the market have spurred more hoteliers to discount rates to drive business, which can lead to marketwide rate erosion, although there are “enough fundamentals out there” that sometime warrant reduced pricing. He said this is exacerbated by concerns over the impact from the sharing economy.
“Once (worries over supply and sharing-economy rentals) calm, then we can get back to a more aggressive rate stance in the city,” he said, noting that the biggest boom days for the market in terms of rate are likely a thing of the past.
Hennessey also said one thing sparking pessimism in New York is that properties, while still performing well in comparison hotels in other markets, are falling short of the “baked-in expectations of super-normal growth rates” many had for the city’s historically ultra-high performance.
“The market is not overbuilt, it’s over-invested,” he said. “There are projects where the operating performance is less than expected. If you repriced hotels to 50% of where (investors) originally thought they’d be, people would snap them up all day long. There needs to be a correction in the capital structure of the hotel business in New York.”
Jan Freitag, SVP of lodging insights for STR, said New York City is starting to see some positive results, with three of the last 12 months seeing positive revenue-per-available-room growth and positive RevPAR expected in February.
But he said the supply under construction does represent roughly a 14% increase for the market, which can’t be skimmed over.
“New York City is one of those rare markets that you can argue if you build it they will come, but will they come in those large numbers?” he said. “That’s going to be interesting to note.”
Freitag said overall he expects New York to be “a fairly healthy market” but doesn’t foresee a breakout.