2019 Was Supposed To Be The Year NYC Hotels Bounced Back. Things Got Worse, Instead
Last year, there were a few rays of sunshine for New York City’s challenged hotel market. But drops in room rates and occupancy suggest any real upswing could still be a year away, if not more.
New York City hotels brought in just short of $200 in revenue per available room — known as RevPAR, it's the industry's leading performance metric — in 2019 through the end of August, according to hospitality data firm STR.
That figure represents a 3.6% drop from the same period in 2018. Occupancy was at nearly 85%, a 1.6% drop. Both metrics had been ticking upward last year, indicating light at the end of the tunnel was not far off.
But the ongoing issue for the city is that despite high occupancy, the rates that these hotels can score are dragging amid an environment of rising costs and significant development in the pipeline.
“We got in the second half of last year, and all of a sudden there was a little bit more optimism in the market,” Newmark Knight Frank co-Head of Lodging Adam Etra said. "Most hotels started to feel like, from an operating perspective, they had a bit of rate power back … the supply pipeline was tapering.
“We came into the first quarter of this year and it was really ugly. You had incredible softness in the first quarter for a whole host of reasons, that carried in the second, and that carried into the balance of the year.”
Etra, who was part of the Eastdil Secured team that brokered Anbang Insurance’s $1.95B purchase of the Waldorf Astoria in 2015, pointed out that there is enormous demand for hotel rooms in the city.
New York is expecting a record 67 million tourists this year, and its occupancy rates would be the envy of other markets around the country — the national average occupancy rate sat at 71.2% in the last week of September, according to STR.
But the development pipeline remains bloated, and there is shadow inventory in the form of Airbnb and other home-sharing services. As a result, next year should continue to be soft from an operating perspective, sources said. The year 2021 could begin the real turnaround.
"The prevailing theme from late last year, early this year to today is people called the bottom way too early," Etra said.
New York City has the deepest development pipeline in the country.
Roughly 5,100 rooms were added to the inventory from July 2018 to June, according to Marcus & Millichap’s midyear hospitality report. And there are nearly 14,000 rooms across 86 projects under construction right now in the city, per STR figures. More than 4,000 more are in the “final planning stages” — which only refers to confirmed projects where construction could begin in the next year. Some of those projects, of course, won't go ahead.
STR Senior Vice President of Operations Bobby Bowers said operations like Airbnb are playing a significant part in the supply and demand, though their presence is hard to quantify.
“Those types of operations siphon off demand; that's a kind of a shadow supply that you don't see,” he said. “There's a fairly significant amount of that demand that might have gone into a hotel before that [now] goes to a shared economy room."
Despite the bleak growth story, there have been some headline-grabbing hotels in New York City lately. This summer, the first-ever Equinox Hotel opened in the lower part of 35 Hudson Yards. Brookfield is bringing New York's first Pendry Hotel to its Manhattan West Complex and HFZ Capital is including the first Six Senses Hotel in the U.S. at its luxury, twisting condominium West Chelsea.
At the Crown Building, OKO Group is planning 83 rooms in concert with its luxury condo conversion. At the famed Waldorf Astoria, more than 1,000 hotel rooms are being converted into about 350 rooms and 375 condos.
Mixing residences with a hotel is a common way to improve the basis of a development. But the city’s luxury residential market is in a well-documented glut right now, too.
“It’s not exciting — and it’s not a catastrophe — but probably a little bit softer than most people thought it would be by this point this year,” Dream Hotel Group CEO Jay Stein said.
His company manages hotels like Dream Downtown and Dream Midtown in the city. He pointed to the jump in minimum wage in the city, the increasing cost of union labor and rising real estate taxes as a drag on properties’ net operating income.
He predicts a turnaround is more than a year away.
“Ever since 2010, it has been drips and drabs,” he said. “When you are in the middle of a very soft period of time, it looks like it will never end. But I think I’m old enough and wise enough to know that is not the case.”
Right now, the city is weighing a new plan that would require developers to seek a special permit to build hotels as-of-right in some parts of the city. The move, reportedly supported by unions, would curtail hotel development.
Some of the city’s biggest hotel names welcome the idea, Crain’s New York Business reported this week, because it could slow down supply. Some smaller operators have railed against the plan.
Meanwhile, a moratorium on converting hotel rooms over to residential has expired, which NKF’s Etra said could also be helpful in lowering supply.
Some forging ahead with hotels in the city say it is hard to paint each submarket with a broad brush.
GFI Hospitality President Joel Rosen, whose firm owns the ACE Hotels in Palm Springs, California, and New York, the Beekman in Manhattan's Financial District and the James in NoMad, said each neighborhood in the city is experiencing its own supply and demand dynamics.
This year, GFI joined with Elliott Management Corp., a hedge fund and activist investor, to buy the Parker New York hotel on Billionaires' Row for $420M. It is planning to spend more than $100M on upgrades to turn it into a hotel and condo mix.
That area, Rosen said, it underserved in terms of accommodations that offer what he describes as a “lifestyle product." Most of what is available in that area are ultra-luxury accommodations like the Plaza, which recently sold for one of the highest per-room prices in history.
Rosen thinks supply will flatten out in the city after 2020, with growth in 2021 as the market starts to stabilize. He said, even amid recession concerns, he has faith in the city’s ability to pull through.
“The industry tends to compete on price when the economy goes down. And I like to think if you can offer a better experience, then the price becomes secondary, even in a recession,” he said. “So if you can provide your customers and guests with good service and you take care of them in good times, you hope they come back to you in tough times.”