Hotel overload

The New York Sun (subscription required) which was until recently bullish on the Manhattan hotel market has a dire prognosis for the local hotel market in an article headlined “Amid Boom, a Fear of Glut in Hotels”. The Sun columnist, Michael Stoler, till recently had headlines that read “Just Let Me Own a Hotel” and “Riding a High Hospitality Industry Pushes even Higher”. So what has changed? In a nutshell – inventory (current and prospective) and investor (including lenders) sentiment. And both hinge on two primeval instincts lurking – to varying degrees – in all individuals: fear and greed.

Sean Hennessey of Lodging Advisors is quoted as saying “The year 2007 will be one for the record books, with about every indicator showing upward trends”. That is certainly true for every owner and operator in New York City but the article also quotes Richard Born of BD hotels, a major hotel owner operator as saying “I think it is reasonable to assume that in the next three years we will see a 30% increase in available room inventory in Manhattan”. Born goes on to state “Our rates have risen 100% over the past four years. I would not be surprised if we return to 2003 average daily rate levels. This will translate to a potential 50% decrease in projected gross revenues and a near total wipeout of operating profits”. For those who have operated in the city over the past two decades will note that 2003 was worse than war and recession wracked year of 1991 when several hotels swooned into the arms of the US Bankruptcy court system.

The notion that hotels are the new Klondike is underscored by pension systems investing directly in New York City hotels. The Sun notes that “Michigan Retirement System is joining the ranks of investors interested in owning hotels in Manhattan. Earlier this month, the retirement system acquired the 14-story, 369-room Hilton Garden Inn at 709 Eighth Ave., on the corner of West 48th Street, and the 10-story, 300-room Hampton Inn Manhattan — Times Square North at 851 Eighth Ave. The state system is paying $475 million, or about $710,000 a room”!!

When absentee owners with little knowledge of local conditions and even less of hotels begin investing, it usually bodes poorly for the hotel industry. Could this time be different? Some indicators that point to New York running counter to the rest of the US include increases in international arrivals (while the US as a whole saw a decline in 2006), better demographics (the city saw an increase in population), and the development of a fourth airport (Stewart International) with a rail link to Manhattan to cater to air-traffic congestion and higher visitation.

Ultimately, whether or not the US slips into a recession next year, a fact that becomes known after a recession is in our midst (the NBER, the economic research organization that clocks business cycles is an ex-post chronicler of recessions), will determine the success or failure of many of these projects. Timing, as any developer knows, is critical for launching a hotel project and getting it right is almost always a game of chance.

Published by

Vijay Dandapani

Co-founder and president of a New York based hotel company for 24 years. Grew the firm to five hotels in Manhattan and also developed a greenfield project at MacArthur airport, New York. Speaker at numerous prestigious forums including Economy Hotels World Asia, Lodging Conference, NYU, Columbia University Real Estate Roundtable, Baruch College's Zicklin School and ALIS. President and ceo of New York City Hotel Association since January 2017.

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