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Tourists Are Back In NYC, But Pressure Is Building On Debt-Laden Hotel Owners

Pent-up demand has pushed New York City’s hotels back close to pre-pandemic occupancy and revenue levels. But whether the bounce is enough to lift owners and operators beyond two years of losses and accumulating debt is another question.

Rising labor and operational costs haven't abated, and after three consecutive months of interest rate increases, many owners that have held on in hopes of refinancing their debt could now be pushed toward selling.

"We will see more pressure on hotel owners being able to meet their debt service payments because debt will be more expensive,” JLL Senior Managing Director and co-head of U.S. Investment Sales Jeff Davis told Bisnow. “Whether or not that leads to more distress is a question mark.”


New York's tourism trade is booming, with foot traffic levels rebounding in Times Square, hotel bookings inching closer to pre-pandemic levels and rosy projections for the hotel sector’s future in the city. Revenue per available room in Manhattan is 5% above 2019 levels, Hodges Ward Elliott Managing Director of New York Hospitality Investment Advisory Jay Morrow said, but that isn't making up for the financial baggage operators are carrying.

“If you go all the way back, we haven't really seen this liquidity crunch since 2009 and 2010,” Morrow said. “We think that pressure will force out some more transactions, and there's still an abundance of capital from an equity perspective that has been raised that's ready to be deployed.”

Close to 100 hotels in the city are struggling at present, Hotel Association President and CEO Vijay Dandapani told Bisnow, and he said beyond higher labor, materials and energy costs, New York hotels' tax burden is making the math even harder.

“Real property taxes in the city of New York for hotels is at the level of 2019, after two devastating years when there was virtually no business,” Dandapani said. “Even in 2021, we were 40% below 2019. So it's just a lot of financial pressure. The capital stack for these hotels — every single hotel that was built, unless it traded hands — remains predicated on numbers that were there in 2019.”

As a result, some owners and investors have made strategic decisions in recent months — resulting in some of the heavily discounted sales of big-name hotels in the heart of Manhattan, JLL’s Davis said. 

RLJ Lodging Trust sold the Midtown DoubleTree for $146M in December last year, less than half what it paid for the property 11 years earlier. In March, Host Hotels & Resorts agreed to sell the Sheraton New York Times Square, the city's third-largest hotel, for $365M after paying $738M for it in 2006.

And in June, Apollo Global Management and investor Newbond Holdings agreed to buy the 478-key Hilton Times Square hotel for $85M, from Sunstone Hotel Investors, a far cry from its 2006 price tag: $242.5M.

Sheraton New York Times Square Hotel, whose owners agreed to a heavily discounted sale earlier this year.

There are approximately 19,000 fewer rooms available than there were pre-pandemic, Dandapani told Bisnow, as some large hotels that closed temporarily have remained open and others have closed permanently and are being converted to housing.

That has boosted occupancy for the hotels that are operating, Dandapani said, although he said owners with smaller bankrolls could be more likely to fall into distress.

"If you have a capital stack from pre-Covid times, you're in trouble no matter what,” Dandapani said. “If you're a sovereign wealth fund, that's fine, you can write checks to the cows come home. But if you're not, then you’re still playing catch-up.”

The future of many of the properties that are playing catch-up depends on actions of their lenders. 

"If you are an investor in this space, relationships really matter," Noble Investment Group Chief Investment Officer Ben Brunt said at Bisnow's Lodging and Investment Summit in Washington, D.C. Tuesday. "This is where you want to call your lender and take 'em to lunch or take 'em to a baseball game, because you're gonna need 'em." 

Some factors are slowing tourism’s return to full pre-pandemic levels. International tourism isn’t quite back to 2019 numbers, with restrictions on travel in and out of China suppressing visitor numbers from one of the biggest-spending tourist groups that normally flocks to NYC. Business travel is still well behind pre-pandemic levels, and a possible recession could diminish its recovery. 

Nonetheless, the risk of catching the coronavirus no longer appears to be affecting travel decisions, LW Hospitality Advisors President and CEO Daniel Lesser said.

“There's no doubt about the fact that the New York hotel market was decimated by Covid,” he said. “There's an awful lot of pent-up demand that's getting unleashed.”

Hotel occupancy was at 83.6% in June this year according to data from the city government’s official tourism promotion agency, NYC & Co. Numbers kept going up in July, with NYC reporting its best week for hotel bookings since the start of the pandemic. 

Recovery has varied depending on neighborhood, industry figures said. Hotels in Lower Manhattan are operating at pre-pandemic levels or better, as travelers seek more creative environments and want to be close to the restaurants and entertainment options in Soho, Tribeca and Greenwich Village, BD Hotels principal Richard Born told Bisnow. He said he has been "shocked" by how well his hotels in Brooklyn have performed.

“Business has bounced back very, very quickly," Born said. "It's also a hybrid of business and leisure — it's people making trips because they have to learn the fashion business, or they have to be in New York for purpose, but end up staying for four or five days or 72 days.”

The return of tourism, combined with hotel operators that might be forced to sell as the cost of borrowing increases, is an appealing opportunity for hotel sector investors, Lesser said.

"The New York City tourism market is coming back with a vengeance, and candidly, I think smart money is investing in New York right now," Lesser said. "Smart money is investing in downtown, urban, 24/7 markets that previously were the darlings of the lodging sector and have now become the dogs.”