By Andrew Posil, Massey Knakal Realty Services

New York’s hotel market has reason to be optimistic. Although there are concerns regarding the increasing number of hotel rooms on the market and rising operating costs, there are also many reasons to be confident in the market’s long-term viability.
With so much product delivering in the next thirty-six months, how can owners and investors remain positive? The answer is that rock-solid fundamentals will sustain the market as new product comes on-line, and that the long term demands of the market will exceed the near-term jump in supply.
There are two key fundamentals buoying New York’s hotel market. First, theNew Yorkmetro area is the nation’s largest metropolitan economy which has consistently out-performed the rest of the country in recent years. Second,New Yorkhas established itself as the nation’s foremost tourist destination and one of the most popular destinations for leisure travelers in the world. According to reports by CNN and NYC & Company,New Yorkhad a record number of visitors with nearly 51 million in 2011 and 52 million in 2012.
The influx of visitors has resulted in record-level occupancy rates pushing RevPAR towards new highs. According to HVS Hospitality Services’ Market Overview, theNew Yorkmetro area average RevPAR will reach its highest levels in history by mid-year 2014, demonstrating a complete recovery from the challenges of the most recent recession. As deep, and previously unrealized, pockets of travelers continue to emerge from Asia, South America, and Eastern Europe, potential for vast gains in the number of visitors toNew Yorkappear possible for the indefinite future.
Recent investment activity in the New York metro area’s lodging sector has topped national and international rankings for total transactional volume in 2011 and 2012. Several exceptionally large transactions punctuated 2012 which elevated the aggregate hospitality sales value. Specifically, the sale of the Plaza for $375 million, Essex House for $362 million, Setai (now Langham) for $229 million, and the Dream Downtown for $187 million drove up the aggregate sales volume for that period. In total, during 2012, theManhattanhospitality sales market accounted for twenty-two trades totaling $2.7 billion.
Although in Manhattan the total investment value of executed hotel sales by the end of 2013 is widely forecast to be slightly less than 2012’s $2.7 billion, the aggregate value for sales across the New York metro area for 2013 will likely surpass 2012 levels due to the ongoing and increased activity in other submarkets, most notably, the emerging hospitality submarkets of Brooklyn and Long Island City, Queens.
Development withinNew York’s lodging sector is occurring at a feverish pace. TheNew Yorkmetro area will add an estimated 15,000 rooms to its hotel supply during the next thirty-six months (2014-2016) according to NYC & Company. That represents a 15% total increase from today’s inventory, and the delivery of new inventory will occur in phases of between 4%-6% growth per year.
The bulk of those rooms will deliver in Manhattan although burgeoning markets in historically underserved areas like Brooklyn,Long Island City, Staten Island, and the Bronx are also experiencing significant development. Notable developments outside ofManhattaninclude: the Bronx’s first luxury-boutique hotel; the Opera House Hotel in East Bronx which delivered in 2013; and the Bronx’s first full-service hotel the Marriott Residence Inn atHutchinsonMetroCenterinEast Bronxopening in 2014.
Staten Island’s hotel market is undergoing a growth spurt of its own with a cluster of three, new, select-service hotels with staggered openings taking place between 2013-2014. The most significant growth in any one submarket has been inLong IslandCitywhich has added fifteen of its twenty-seven hotels in the past six years.
Across the market, the high level of development activity gives the impression that developers are bringing a glut of product online. However, according to HVS,Manhattan’s annual growth in demand has exceeded its growth in supply for the past twenty-five years resulting in a pent up demand for additional lodging that is, only now, being adequately addressed.
As always, hotel owners are focused on profitability. There are several issues that hotel owners face at the moment which have put added pressure on the bottom line. The addition of 5% of new inventory for each of the next three years will slightly outpace the growth in demand which will slow the annual growth in average RevPAR.
Even so, RevPAR is predicted to grow between approximately 3-5% per year during that period. Aside from the challenges of maximizing RevPAR, increases in; taxes, utilities, and labor are, in many cases, reducing owner’s returns. Taxes pose a threat to hotel owners in two forms: property taxes which directly hit the bottom line, and hotel room taxes which add costs to the consumer, ultimately limiting ADR. Furthermore, increased utility costs are a concern as are increasing labor costs, particularly in organized workplaces.
Thus, the myriad of operating cost increases in the current environment have reduced profitability, to some extent, for many hotel owners despite the outstanding performance of the asset class from a gross revenue standpoint.
Looking ahead, the influx of supply will add near-term drag to market-wide RevPAR, the long-term outlook for theNew Yorkmetro area’s hospitality sales market is bullish.
Although the “proverbial crystal ball” remains elusive, there are five emerging trends that are likely to define the hospitality sales market in the New York metro area in the next few years.
First, RevPAR across the market will continue to rise although increases will be tempered by increased supply in the market. Second, investor returns will continue to tighten as RevPAR growth slows somewhat, operating expenses increase, and competition to acquire properties compress cap rates. Third, return driven investors will continue to look for potential upside through improved asset management and innovative hotel concepts. Fourth, investors will be attracted to the periphery of the marketplace where risk appears higher, but commensurate returns remain achievable, thereby increasing sales activity in the boroughs, Westchester andNorthern New Jersey.
And fifth, fierce competition between operators for would-be guests, will lead to a market-wide improvement in the overall quality of the lodging stock in the New York metro area including a wave of distinct new concepts.