NYC Hotel Industry Starts Decade Facing Threats From All Sides
The start of the 2020s are shaping up to be challenging for the city’s hoteliers, as the oversupplied industry faces rising costs, more government control over development and heightened demands from their neighbors.
“Communities are getting louder,” The Monroe Group CEO Desmonde Monroe said at Bisnow’s Hospitality Investment, Development & Management Summit last week. Monroe is a development consultant who has worked with builders and local groups.
“In this digital age, we have no problem getting on [the internet] and saying, ‘This is the developer, these are the hoteliers that don’t care about where they are putting their buildings — and for that, don’t patronize them,' and we will do that, and we do it all the time.”
The hospitality industry in New York City has been facing a flood of supply for some years now, which is pushing down room rates — even in an environment of booming tourist numbers and high occupancy levels.
Tens of thousands of rooms are set to be added to the city’s supply by 2022, and there are vast levels of shadow inventory in the form of short-term rentals further weighing on the industry.
Last year, the industry's leading performance metric, revenue per available room — known as RevPAR — dropped by 3.6%, two years after some hotel experts predicted that the worst of the city's hotel performance trough was over.
Despite the competition, hotel developers are by their nature hungry to find a place where they can find a niche. But as they explore new areas, they face new obstacles.
“Any time you put up a physical structure in New York City and it’s not housing, you will get pushback,” Monroe said. “[But] we’ve seen a lot of boutique hotels offer their community space at a discount rate … When they open up space beyond the customer, they are still getting an uptick because the community is now using that space.”
Panelists said engaging with community groups early in the development process, providing space free to charities for events, hiring locally and including open public space in hotel developments all can sweeten the pot for the community to greenlight a development.
“Anyone who builds a hotel and plops it in and does not work well with the community around them is delusional,” JF Capital Advisors CEO Jonathan Falik said. “They must embrace the community and make sure they are a good neighbor and player, [but] they are not making net profit, at the end of the day, by having local community people sit in the lobby activate it.”
Certainly, staying profitable in the current environment is crucial — as the economic boom seemingly marches on, many in the hospitality industry are thinking ahead to when the downturn may come. Sliding RevPAR, the slew of new developments on the horizon and no reliable data on just how many short-term rental units will be available are all causes for concern.
But Pod Hotels Head of Acquisitions & Development Rani Gharbie said investing in the community is closely linked to the performance of a hotel.
“A bad relationship with the community transpires in the service of that property. If you want a property to be sustainable in the next five, 10 or 15 years, you better start the community work as early as possible,” he said.
Gharbie said it connects to the core business, too: Travelers want to feel like they are connected to the local experience.
“You have a fiduciary duty for your hotel to act as a catalyst to the neighborhood and to the city around you," he said.
The next few years will be kind to hotel real estate players, he said — as long as they are buyers.
“You'll have a lot of unsatisfied shareholders of hotels that have opened recently or are going to open in the next few years,” he said. “If you are on the buy side in New York expanding a brand or developing independents hotels, you are probably going to be on the hunt for some really exciting deals for potential repositioning or conversions.”
Though panelists noted the city’s occupancy levels are high when compared to the rest of the country, and visitors continue to come to the city at record levels, taxes and costs will continue to challenge the margins of the local market.
Hotel Association of New York City CEO Vijay Dandapani said property taxes have gone up almost 100% since the Great Recession.
“Across the board, the city has been quite unsympathetic to us,” he said, adding that while the possible new permit requirement will curb future development, the presence of Airbnb and its ilk will keep adding inventory to the market.
The de Blasio administration passed a strict ban on Airbnb-style rentals in most city apartment buildings in 2016, but Airbnb won a victory last year when a judge struck down a separate policy requiring the company to provide the city with its hosts' listing information.
Aimbridge Hospitality CEO Dave Johnson said scale is going to be a key factor in the success of hotels in the next three to seven years, as RevPAR slows and costs and margins become crucial.
”I mean, New York City is a great example. Your costs are going to go up 5% here if you own hotels, and there is nothing you can do about it,” he said in his keynote comments. "You don’t have to be a math major to know that’s going to be a problem as far as real estate values.”
Some panelists pointed out that with hotels, like other assets, there has been a vast disconnect between sellers' and buyers' expectations — resulting in fewer deals than usual at this point in the cycle.
Others noted the strength of the lending market has pushed many hotel owners to refinance rather than sell, and some said the large amounts of dry powder that has been raised for real estate funds will have a major impact on hotels throughout 2020.
And while most say that traditional hotels and short-term operators are not competing for the same business, there is no denying Airbnb's growth will continue to have an impact on the industry, both in New York City and nationally.
“The fear is also driven by lack of transparency,” Goldman Sachs Hospitality Managing Director Neha Santiago said of short-term rentals. “We are starting to gather the data, but as institutional investors, we like being able to quantify supply and demand, so this unknown is lurking out there, especially in markets like New Orleans where there is far less regulation ... The barriers to entry for the shorter-term stay suppliers is quite low. That's the scary part, how do you underwrite what that supply looks like?’”