Tepid rate growth mars NYC’s robust outlook
Tepid rate growth mars NYC’s robust outlook
17 OCTOBER 2013 8:55 AM

New York’s outlook is promising, despite tepid rate growth and other nagging challenges.

NEW YORK—New York is most notable for the exceptionally active pipeline of new projects planned for the market. This is a testament to the perceived strength, durability and outlook for travel demand. Yet despite this robust outlook, the city suffers weaknesses and future threats that should not be ignored.
The following review summarizes the main attributes underlying hotel operating fundamentals in New York.

First, it is necessary to delineate the market and submarkets. As tracked by STR, parent company of Hotel News Now, the New York Metro area includes the five boroughs of New York (Manhattan, Brooklyn, Queens, Staten Island and the Bronx) together with the New York state counties of Westchester and Rockland Counties. The statistics for the New York Metro area would show higher occupancies and average daily room rates if Westchester and Rockland County hotels were excluded.

The five boroughs comprise New York. Within the city, Manhattan is the only market for which hotel statistics have been available until recently. STR now tracks the “New York City Area,” what is referred to as the outer boroughs, or all of New York excluding Manhattan. With the hotel boom in Brooklyn, that borough is also tracked separately as well.

To provide some context, the following table breaks down the New York Metro area into its geographical subdivisions, with occupancy and average daily rate statistics for the most recent full year:

As seen in the table, Westchester and Rockland bring down the metro area average, although the impact is small because these two counties comprise less than 10% of the metro area’s available rooms.  There is virtually no price difference in room rates between Westchester and Rockland counties at $145 and the outer boroughs at $144. This demonstrates that it’s difficult to capture that Manhattan magic in any place other than Manhattan. Although Brooklyn is gaining ground in this regard, the ADR disparity to Manhattan remains significant, given the borough’s limited commercial demand base.

The metro area’s high occupancy rate also is notable. By my calculations using STR data, the occupancy rate for the New York Metro area is 84.9% for the trailing 12-month period ending 30 June 2013. That is the highest occupancy rate on record for New York, at least for the past half century. At an occupancy rate of nearly 85%, the market is sold out for much of the year. This fact has not been lost on developers.

Click chart to enlarge.

Click chart to enlarge.

NYC hotel demand
Considering the outlook for global economic growth, the outlook for foreign inbound tourism to New York remains tepid. During the past year, the eurozone economies have remained mired in a recessionary environment. While economic growth is forecasted by the International Monetary Fund to turn positive in 2014, very low growth—less than 1%— will not stimulate additional inbound travel.

But the emerging markets and developing economies of Brazil, Russia, India and China should continue to exhibit healthy growth in travel demand, helping to overcome a weak eurozone. Brazil is particularly important, given its proximity to New York and its prospective entry into the Visa Waiver program.

But despite subpar economic growth worldwide, robust increases in tourism are anticipated. And it is difficult to overestimate how global travel demand might benefit New York.

Global travel is expected to grow by 325 million international travelers by 2020, according to the United Nations World Tourism Organization. Also, the U.S., through the efforts of marketing outreach via Brand USA, is seeking to increase the country’s share of global travel to welcome 100 million global visitors to the U.S. by 2021.

Because roughly one in three inbound foreign tourists visit New York, the outlook is promising, assuming there is slow near-term economic growth around most of the world. Even if only part of this travel scenario plays out as anticipated, there should be plenty of new tourists to New York and substantial demand for the new and planned hotels in town.

Domestically, a weakening of the U.S. economy could dampen hotel demand for New York. According to STR, demand has been sensitive to outside events. For instance, in the 12 months following the attacks of 9/11, Manhattan hotel demand dropped 5.5% before recovering. Also, demand in Manhattan dropped 3.7% during the 12 months following the fiscal crisis in 2008.

Yet, demand historically has bounced back quickly both times. Forecasts from the Conference Board and others anticipate the national economy gaining strength in 2014, which should help sustain strong demand.

Similarly, the New York economy is expected to see its gross metro product improve by 3.4% in 2014, according to Moody’s Analytics.

The city carries positive momentum in 2014, with substantial new development activity in lower Manhattan and the Hudson Yards districts. A new mayor, likely to be less pro-growth than the outgoing Mayor Bloomberg, could certainly slow but not stop the positive momentum.

Group demand makes up about one-quarter of all local demand, according to Lodging Advisors and STR. Through mid-2013, group room rates are growing faster, at 4%, than transient room rates, which are growing at 3%. Further, group room rates are only 4% below transient rates.

A firming base of group demand, which has lagged transient demand growth, theoretically should set the stage for better yielding and higher room rates from the transient segment.

The New York Metro area will set a record for hotel demand this year, with more than 32 million occupied rooms as year-to-date June, according to STR data.

Demand has grown more than 5% per year during the 2011-to-2013 time frame, which is well above the level of the national hotel demand.

New hotel supply
According to STR, New York Metro has a pipeline of 162 hotels with 24,335 rooms as of September.

Click chart to enlarge.

Click chart to enlarge.

Historical attrition rates, which are projects proposed but never built, suggest that only about half of the pipeline is likely to eventually result in new hotels. In recent years, the addition of new rooms has actually resulted in a higher citywide occupancy rate. But will the oncoming planned projects finally cause occupancy levels to fall?

Recent history suggests New York can continue to attract customers. But all those new hotels are creating intense price competition that will keep room rate increases at historically modest growth rates.

New York has been losing guestrooms in a way that doesn’t enter into published statistics. Municipal officials have been moving aggressively to shut down “thousands”—the city does not provide actual figures—of illegal hotel rooms.  These illegal transient rooms are most often units within apartment buildings but also a number of bed and breakfasts and transient hostels. An interesting offshoot of the city’s crackdown on illegal hotels is a pending effort that will specifically establish regulations for hostels. If passed, this measure could stimulate interest in developing very low-end transient accommodations.

High occupancy rates have been the shining strength of the New York hotel market. Even with new supply, occupancy levels have remained high and actually improved. 

The weakest occupancy is for luxury hotels, which have a limited propensity to accommodate group business, often eschew corporate negotiated rates and often discount less in an effort to maintain an air of exclusivity.

But even Manhattan luxury hotels are operating in the low-to-mid 80% range as of year-to-date August, according to STR, suggesting unmet demand at the high end of the market. This is borne out by the recent uptick in luxury hotel projects around town: Baccarat, Firmdale and Park Hyatt hotels are under construction; a new Four Seasons just received construction funding; and a number of other projects are planned.

Across the East River, Brooklyn hotels are full approximately 82% of the time, as of year-to-date August, indicating that this submarket is maturing quickly as well.

Given the strong demand trend, it seems odd to see New York faring poorly in room rate growth. New York Metro has been lagging the top 25 markets for the past few years.

Click chart to enlarge.

In past recoveries, the New York Metro area has seen double-digit growth for years at a time. While the New York market displayed a strong recovery early in the cycle, the bounce-back effect petered out after a few months, and room rate growth has been positive but mired in the low single digits. There are several logical explanations for this:

  • New hotels offering introductory rates dampen room rate growth.
  • The mix of hotels in the city has changed somewhat. Few luxury or upper-upscale hotels are entering the market, while many midscale and select-service hotels are opening. This creates a downward effect on room rates. The number of new and planned pod hotels is indicative of this trend.
  • An increasing percentage of hotel rooms are being built outside Manhattan, where room rates are naturally lower.
  • The continued growth of Web-based booking options, and the associated pricing transparency they foster, have had an ongoing effect of reducing the consumer’s cost of comparison shopping and making price competition more acute.
  • All of the new hotels, together with online booking options, have sustained short booking windows, which diminishes hoteliers’ pricing opportunities.
  • ADR in New York is well above prices achieved in other major U.S. hotel markets. There are some consumers on the margin who will decide to take their business elsewhere.

All of these trends suggest that ADR in New York will continue to grow in the low single-digit range, at least until the bulge of new hotel projects is absorbed and the U.S. and world economies return to historical levels of economic growth.

Lodging Advisors expects occupancy levels in New York to taper a bit in 2014, as new hotel openings continue to put pressure on the market. Even hosting the Super Bowl next year looks as if it will not lead to a major effect on the annual performance statistics. However, the economic indices suggest demand should increase next year, and global tourism trends should continue to move in New York’s favor.

A summary of the major trends to watch for in 2014 are:

  • New York’s economy growing faster than U.S.;
  • Wall Street hiring has continued to weaken;
  • robust forecasts of global visitation and benefits of Brand USA marketing;
  • new hotels (and more to come) clearly are impacting hoteliers’ ability to raise room rates;
  • group meeting business is rebounding somewhat;
  • New York office market development is booming; and
  • the U.S. economy has avoided the threat of a double-dip recession as stimulus withdrawn and sequestration cuts enacted.

Click chart to enlarge.

Click chart to enlarge.

Click chart to enlarge.

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