Continued demand growth in New York City has been a foundation of the market’s performance recovery.
HENDERSONVILLE, Tennessee—New York City’s hotel market is showing positive signs of recovery through the first half of 2018.
The magnitude of both leisure and business travelers each year allows New York to consistently rank among STR’s top 25 U.S. markets time after time. With world travel at an all-time high, New York’s hotel market is experiencing strong growth among its key performance indicators. (STR is the parent company of Hotel News Now.)
Over the last few years, STR has seen New York occupancy rates slowly rising; 2017 finished strong with overall occupancy growth of 1.1%. While this may seem insignificant, the market has not seen occupancy growth in excess of 1% in the last six years. Occupancy growth of 1.1% is also coupled with nearly 1.8 million more rooms sold than in 2016.
June 2018 yielded one of the highest occupancy rates recorded in New York City at 91.1%. Although occupancy is reaching new growth levels, the same trends are not seen in terms of average daily rate. ADR saw overall decline in 2015, 2016 and 2017. However, ADR has seen promising growth in both the first and second quarters of 2018. Despite ADR finally seeing growth, ADR is not reaching rates that would be expected with the occupancy recorded.
New York hoteliers face several questions. Why is occupancy growing? Can New York support the increasing demand? Why is ADR not hitting historical records?
Each year, New York hotels are selling a million more roomnights. New York City benefited from year-over-year occupancy growth in five out of the first six months of 2018. This year started strong with the biggest occupancy growth seen in January (+4.2%), February (+3%) and March (+3.3%). There was a slight dip in April (-1.2%), but the market showed growth again in May (+2.1%) and June (+0.7%).
The pace of supply growth has slowed in New York. In June 2016, year-to-date supply growth was 5.3%, 4.3% in 2017 and 3.7% in 2018. With real estate in New York City being exceptionally expensive in the Manhattan submarkets, developers are looking for properties that yield higher internal rate of return, such as apartments and class-A office buildings.
Additionally, New York has seen revenue-per-available-room declines in the last three years while total U.S. RevPAR reached its 100th consecutive month of growth in June. With skepticism regarding overall industry health and RevPAR decline in the market, developers might be fearful of a market crash, which could be a cause of slowed supply growth.
New York hotel demand has consistently increased in the last three years. Year-to-date demand through June was up 5.3% in 2016, up 5.6% in 2017 and up 5.6% in 2018.
This demand increase may be linked to a few factors. First, with the exception of January, all major airports in the New York City area are experiencing traveler growth on both the domestic and international side. To accommodate future travel growth, LaGuardia Airport is undergoing major renovations to allow for the increased passenger demands which could also help the New York lodging industry see continued demand growth.
Additionally, the U.S. economy has been strong with GDP per capita growth since the Great Recession and unemployment rates hitting the lowest point in 10 years. Strengthening GDP allows families with secured jobs and stable incomes to plan more trips, a trend that can be seen within the increasing consumption and investment components of GDP. Finally, both the S&P 500 Index and the Dow Jones Industrial Average have seen strong growth in the end of 2017 and beginning of 2018, signaling market health. With overall U.S. business being strong, companies can support increased business travel.
The ADR effect
The increases seen in New York hotel occupancy have translated to monthly ADR growth in the first half of 2018. The largest monthly year-over-year ADR growth during that period was reported in March (+7.6%), May (+5.1%) and June (+4.7%). While New York hotels are currently seeing ADR growth, the market has reported rate declines in the three prior years.
We can speculate this is correlated to the market share change per class. In 2010, full-service properties represented about 44% of the market, while now they represent only 39%. With increased market share coming from select-service hotels, we can assume overall ADR is being brought down by lower ADR classes.
With continued demand growth and new supply slowing, developers are still looking for new investment opportunities, especially in boroughs other than Manhattan. Areas like Brooklyn, The Bronx, Jamaica and Queens are undergoing gentrification which result in new hotel supply being developed in these areas. Nearly two-thirds of the current pipeline of rooms in construction are coming from these submarkets, which is more than previous years. Real estate is cheaper and more readily available than Manhattan, allowing for developers to focus on more select-service properties. Although ADR has experienced declines, based on early 2018 results the market should expect ADR growth for the remainder of the year.
Takeaways from RevPAR numbers
Having strong growth in both occupancy and ADR, New York hotels reported strong year-over-year RevPAR gains in March 2018 (+11.1%). RevPAR growth was also strong in May (+7.3%) and June (+5.3%). We are seeing accelerated growth rates in the first and second quarter of 2018 compared to the last five years. With the exception of April, the RevPAR growth rates are at the highest levels since 2013. As long as the market continues to show occupancy and ADR growth, RevPAR will also grow for the remainder of 2018.
Supply growth rates have slowed, however, New York City has benefited from more travelers and a strong economy further boosting occupancy rates. Opportunities to develop new supply are still attractive, especially for select-service properties in the expanding submarkets outside of Manhattan. ADR and RevPAR are showing signs of accelerated growth that indicate positive signs of the market’s health.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.