Although Manhattan hotels are enjoying continuously high occupancy, hoteliers in the market are struggling to turn that into higher nightly rates. But there are signs that could change, sources said.
NEW YORK—The Manhattan hotel market has been plagued by new supply for years, hampering hoteliers’ ability to push rate even as occupancy grows.
However, there are signs those in the market shouldn’t give up hope just yet.
“I think there’s some reason to be optimistic about Manhattan based on how 2017 has gone,” said Scott Berman, U.S. hospitality & leisure practice leader at PwC. “It’s certainly been better than the past two years, but it’s by no means where the market was prior to that. New York City is absorbing a lot of new supply.”
The metric to watch is room rate, he said. There’s been quite a bit of compression, he said, but the financial services sector is coming back.
“A healthy U.S. economy and healthy financial services sector generally bodes well for the hotel market in New York,” he said, though he cautioned the market remains muted.
Supply and rate
Data from STR, parent company of Hotel News Now, shows 15 hotels opened so far in 2017 in Manhattan, adding 3,610 rooms to the market.
Supply growth was sizable for New York overall, said Jan Freitag, SVP of lodging insights at STR. While that number has probably peaked, he said, that should not detract from the 12,000 rooms under construction for the city.
The market overall has had an “If you build it, they will come” experience, in which growing demand manages to outpace supply, he said. Freitag pointed to an occupancy run of 86.5% from the beginning of the year through October, which he said is tremendous performance, equating to filling almost nine out of every 10 rooms available.
“It’s no wonder developers feel very attracted to the market,” he said.
However, he noted, ADR has still declined, with room rates down 1.5% year to date.
Manhattan has a supply growth rate of 7.8%, he said, which is four times the national average. While not every room will open tomorrow, he said, even dividing that figure over two years gives the market a growth rate double the national average. Almost half of the new rooms will be in the upscale and upper-midscale segments, he said, and the brunt of the new supply will be in the limited-service space.
“Occupancy continues to grow, but the lack of pricing power is probably an indicator the new rooms have an impact on existing properties,” he said.
The latest PwC Manhattan Lodging Index reports that demand in the third quarter grew 3.4% year over year, outpacing supply, which grew 2.2%. However, the market still lacked pricing power, so average daily rate fell 2.3%, which meant revenue per available room fell 1.1% despite the 1.2% increase in occupancy. For the first three quarters of 2017, RevPAR in Manhattan dropped 1.3%.
The luxury and upper-upscale segment reported the highest occupancy growth among the chain-scale segments, along with lesser drops in ADR, in the third quarter, according to the index. Luxury was the only segment to see RevPAR growth (+1.5%), the index shows.
Each of Manhattan’s five submarkets reported decreases in ADR, but hotels in Upper Manhattan and Midtown East had high enough occupancy to negate the losses in ADR, the index states.
It’s not a demand issue in New York, Berman said, as both group and commercial business are relatively stronger. It comes down to room rate compression, more than the number of occupied rooms, he said.
For example, he said, there is strong demand for hotels in December, but hoteliers may still struggle to parlay that occupancy into stronger room rates.
Part of the reason for the lack of rate integrity is many of the bigger convention-style hotels haven’t seen the big groups coming in, or those bookings are coming in later, said Hung Luk, COO of the Lam Group. The natural tendency for hoteliers in this situation is to lower prices out of fear they can’t capture the market, he said, and this approach affects the entire market.
“In New York, the Hiltons, Marriott Marquis and the Sheratons, they are like the market leaders for pricing,” he said. “If their pricing goes one way, everyone follows.”
The Lam Group’s hotels are seeing relatively flat performance, he said, having outperformed the market a couple of months but seeing that offset by weaker periods more in line with its competitors. Many of the company’s hotels are select-service properties, he said, so it’s not seeking group business as much as others might.
“We’re predominately of the business transient, leisure travel segment,” he said. “We’re better able to control our pricing and inventory. There are times when we have kind of off periods when we’re riding along with the market, but during the period of time where demand is there, we exceed the market. Our strategy is not to be desperate. We know the demand is there. We’re willing to wait.”
The Manhattan borough has seen nine hotels bought and sold as of the PwC’s latest index, seven of which occurred in the third quarter. The latest hotels transacted are: the 42-room Hotel East Houston ($16.7 million); the 113-room Morgans Hotel ($37 million); the 487-room DoubleTree Suites by Hilton New York City - Times Square ($200 million); the 169-room Royalton Hotel NYC ($55 million); the 224-room DoubleTree by Hilton-Times Square South ($106 million); the 89-room Hotel Wales ($35 million); and the 171-room NYMA, the New York Manhattan Hotel ($52 million).
In year-to-date figures, the sales volume for Manhattan was 29% of what the market saw during the same period in 2016, said Jeffrey Davis, international director at Jones Lang LaSalle.
“It was significantly down from the number of deals and dollar volume,” he said.
The debt capital markets are frothy, he said, and there were many assets on the market in 2016 that didn’t clear from a sales perspective in New York. The bid-ask spread between buyers was too much, so there was still a bit of that overhead in 2017, he said.
That’s in line with the rest of the U.S., which has seen a relatively slow year, transaction volume-wise, he said. Many in the industry are taking a wait-and-see approach, he added.
There isn’t a lot in the pipeline to bring to market in 2018, he said, and with the perception that New York fundamentals are hitting bottom, developers are holding off for the right opportunity. “They’re all kicking the tires,” he said.
JLL expects that the storm is over, and investors will see a way to a respectable recovery in the market, which is attractive for buyers, Davis said.
Things will look better after 2018, he said, because demand continues to be strong, supply will slow, and rate integrity will return. The debt capital market has liquidity, he said, so there aren’t problems borrowing. There has also been a dearth of quality, with too much equity chasing too little product, he said.
“This all bodes well,” he said. “There’s activity to reinvigorate New York.”
From the Lam Group’s standpoint, Manhattan will see improvement because more groups are booking in advance compared to the prior year, Luk said. Hoteliers who understand the market and where the business comes from shouldn’t panic and worry about the additional supply coming in, he said. The city is a different animal, he said, and it will change over time.
While there are new hotel rooms coming online, he said, many major hotels have reduced room inventories because they’ve found it more advantageous to move into the residential space.
The only thing that could truly upset the overall New York market and stop people from traveling there is an international disaster, he said, but that would affect travel in general, not just to New York City.
New York City is sort of an anomaly in the U.S. hotel market, Freitag said. The industry continues to be underwhelmed by the lack of pricing power in the high-occupancy market, he said, and he doesn’t anticipate anything that would trigger a change in pricing, especially considering all the new rooms coming into play in the limited-service space.
However, the national macroeconomic picture continues to be positive going forward as the GDP continues to increase and the economy looks to get a shot in the arm from the impending tax legislation, so that probably bodes well for occupancy going forward, he said.
“I think it will very much be steady as she goes and more of the same,” he said.