“City Hotel Rates Rising, but Occupancy Along for Ride” screams the front page headline in the New York Sun of December 15th 2006. The article notes that “Higher prices — predicted to average 36% more in 2006 than in 2003 — don’t appear to have seriously hurt the hotels’ occupancy rates, which are projected to average 85% for 2006”. What it doesn’t note is that 2003 was the very bottom of the hotel industry for New York with inflation adjusted rates and NOIs worse than what prevailed during the gloom in the run-up to the Gulf War of 1991. No hotelier in the city is complaining about the rates but a little repeated stat is the GOP – and that barely has crested the levels seen in 2000 – the best year ever. The reasons of course are higher energy prices, real estate taxes, labor and other operating costs – all of which, like the much noted hotel room rates, have beaten inflation.
Cornell Hotel School professor Jack Corgel is quoted as saying “that Manhattan is unlike sprawling municipalities where hoteliers can meet heightened demand simply by building at the next interchange. You can’t do that in New York,” he said.” But that is exactly what is happening in parts of the Big Apple where developers are building hotels at a fast and furious pace often on the same block! Examples can be found on 39th street between 8th and 9th where the same developer is building three hotels. Ditto for other blocks like 29th street on the west side. Nevertheless, the professor is obviously right in noting that “The laws of supply and demand usually restrain prices from becoming expensively unwieldy”. And that is likely to happen over the next 2-3 years as everyone pitches headlong into hotel development – if NYC and Company’s numbers are to believed (unlikely) some 16,000 rooms are slated to come on stream; a number that would swell supply by greater than 20%. Occupancy will certainly not be along for the ride in that scenario.