The Washington Post reports that Dubai Investment Group (the investment arm of the government of Dubai) recently bought the Essex House for $500m (a whopping $1million a room). Using the old industry rule of thumb, that should result in an ADR of $1000 – unlikely even in today’s exceptionally strong hotel market in the Big Apple.
So is it a reprise of the eighties when the Japanese bought trophy real estate like Rockefeller Center(which incidentally brought on more than a little xenophobia) at exceptionally high prices only to take a bath in the downturn that followed? That seems unlikely. For starters, the current high in real estate prices has not been driven by the frenzied lending (domestic and internationally) that preceded the steep valuations in the eighties. Secondly, Dubai Holding is not known for acquiring assets and keeping the status quo. As the Post article notes, the Essex House is already undergoing subtle but major changes at all levels, particularly employee training and orientation. The result is likely to be a substantive push upwards in rates in a supply constrained market.
Dubai can also take heart from a couple of factors. That their per room cost likely comes significantly below replacement cost. Just a dozen years ago, the I.M.Pei designed Four Seasons on 57th Street opened at more than $1million per room – their ADR has more nearly quadrupled from its 1993 level but still is below a $1000. Secondly, unlike the imbroglio that wrecked their ports deal, there has been nary a whisper (as it should be) about their acquisition of the Essex House. In fact, in the last few months, Dubai Holdings has spent over a $1billion on US real estate including its acquisition of rental apartments in the Sunbelt. Clearly, their bet is on continued vibrancy in the US market.