The conundrum that is the New York hotel market
The conundrum that is the New York hotel market
25 MAY 2017 8:26 AM

Despite concerns over supply and demand, driving rates, Airbnb and effects of a proposed travel ban on international visitors to the gateway city, the New York hotel market remains attractive to developers. Why?

There’s no hotel market in the United States that is more challenging than New York City.

Hotels in the city seem to operate under different and seemingly more precarious supply and demand principles than elsewhere in the country. However, with the great risks that come with owning and operating hotels in New York also come tremendous opportunities.

As cliché as it might be, it’s also true: If you can make it in New York, you can make it anywhere.

Occupancy is consistently high—especially in Manhattan but also in other boroughs. And while average daily rates are among the highest in the country, operators have difficulty raising rates. And on top of these issues, New York is the most unionized hotel market in the city, which translates into high operating costs.

On an annual basis, occupancy in Manhattan has been above 86% since 2012, yet the largest yearly increase in ADR was 3% in 2013, and rates fell in both 2015 (down 1.9%) and 2016 (down 2.9%).

Hotels in Brooklyn haven’t fared much better, with occupancies hovering around 80% in recent years but with sluggish ADR growth (up 0.5% in 2015 and 1.8% last year).

Hersha Hospitality Trust is among a number of ownership groups than have felt the effects of slow rate growth in New York. Operators of the real estate investment trust’s seven Manhattan hotels achieved 94% occupancy in the first quarter but were only able to increase rates by 1.7%. 

What’s holding down rate growth?
Several obvious trends seem at work in keeping hotel operators in the city from maximizing rates in such a high-demand market.

The easiest factor to identify is the unrelenting pace of new development that’s been underway in New York—both in Manhattan but also the outer boroughs—for the past decade. According to STR, the parent company of Hotel News Now, 176 hotel projects with 28,181 rooms were reported under contract as of April 2017.

The pipeline includes 92 hotels with 15,649 rooms under construction and 28 properties with nearly 5,000 rooms that recently opened in the market. That’s a lot of rooms to add to a market with an existing supply of 115,532 rooms.

Developers are rabid to build hotels in New York City, despite the fact the market is the most expensive place to build in the world. Construction costs are $354 per square foot compared to runner-up Zurich ($328 per square foot). Obviously, the economics pay off. 

Airbnb and other sharing-economy accommodations services are also a drag on the city’s hotel industry. In times of high occupancy, when hotels normally can raise rates and boost their bottom lines, many travelers—especially leisure visitors—are turning to Airbnb as a lower-cost alternative.

And while a new law in New York makes it illegal to advertise home-sharing listings for rentals of 30 days or less, enforcement of the regulation has so far been painfully slow. According to a report, as of early May the city had cited fewer than 140 illegal listers. At this pace, with potentially more than 23,000 illegal listings in the city, it would take inspectors 43 years to cite all scofflaws. It appears Airbnb will remain a thorn in the side of the city’s hotel industry for some time to come. 

As the major gateway U.S. city for visitors from Europe and the Middle East, New York could see lower volumes of international visitors due to several factors, including President Donald Trump’s proposed ban on travel from seven countries and the possibility of a ban on laptops from flights flying into the U.S. from some European and Middle Eastern countries.

And probably most critical is the strength of the U.S. dollar, which has made New York an even more-expensive destination than it is otherwise.

Silver linings
The city is considering extension of a ban on certain hotel-to-condo conversions. Under a current law passed two years ago, it’s illegal to convert hotels with more than 149 units into residential condominiums. Not surprisingly, the city’s real estate industry opposes the extension, while hotel operators would probably like to see further conversions to alleviate some competition.

New York is a hotbed for hotel development and probably will remain that way. Despite its many challenges, it’s still a preeminent hotel market in the U.S. and globally. Demand for hotel rooms continues to grow even as developers open new properties. Through March, hotel demand grew by 6.2%, while new supply rose 5.2%. That’s an arbitrage that both hotel owners and operators in the city can appreciate, and which will continue to fuel interest in the city from hotel owners and operators.

The opinions expressed in this column do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.

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