Even during the recent economic downturn, real estate held its own as an alternative investment. Despite turmoil in private equity sectors and the hedge fund, real estate falls under the alternative category in a big way. Real estate is used for the pensions, foundations, and endowments.
Real estate differs from the private equity and hedge funds that invest in varied assets. Real estate is in a unique class whose returns originate in economics – the demand and use of real estate – whether industrial or commercial such as office buildings or hotels. Therefore, real estate is classified as an 'alternative' – either in passive or active circumstances.
Of course, the Real Estate Income Trust (REIT) is an example of active real estate investment. This 'active' investment is always in harm's way during a financial crisis. Yet remarkably, as during the recent recession, they survive the turmoil, regroup, and rebuild in the recovery period. Currently, 'rebuilding' is the status of REITs in 2011.
|Image courtesy of reits.com|
In fact, REITs made an encouraging show during the past year. According to the National Association of REITs (NAREIT), REITs in the US grew from less than $200 billion in 2008 to almost $400 billion by the end of 2010. Yet there is a passive/active question surrounding REITs.
Does active management in real estate increase value? Do active REITs beat passive real estate indexes? During a 2010 study at the University of North Carolina at Charlotte, a team compared REITS managed by NAREIT and several passive indexes managed by the National Council of Real Estate Investment Fiduciaries (NCREIF).The REITs came out as the winners and performed well over 25 years compared to the passive indexes.
With Sharpe ratios, analysts can examine the volatility of both types. Passive indexes had low volatility. REITS showed high volatility and yielded mixed results.
Equity REITs had the most favorable REIT Sharpe ratio – although surpassed by the broad NCREIF index. Mortgage REITS, a smaller sector of the REIT industry, did not perform well in Sharpe ratios. Yet the University of North Carolina researchers examined the performance of REITs investing in different real estate types and REITs beat indexes in terms of raw returns. Office REITs led with almost 15% annualized return and commercial mortgage REITs came in last with results of 2% returns over the last ten years.
Of course, the industry is still overflowing with all types of questions about REITs. How do REITs rank in the Sharpe ratio with risk-adjusted returns? Since you do not invest in NCREIF indexes, is it appropriate to compare them with REITs? Is there a lack of diversification in REITs? Although investment is always a complex issue, signs indicate that REITs are rebuilding and gaining strength in a recovering economy.
On another topic dealing with investment in the future, the Obama administration's recent announcement of the 'Better Building Initiative' means that REITs can take advantage of this tax credit. This latest environmentally-friendly program hopes to encourage a 20% improvement in commercial energy efficiency by 2020.
The current NYC hotel market is synonymous with endless activity. Speculation abounds as outsiders wonder "what's the big deal" and industry insiders know the score. There was never a more exciting time to invest in NYC hotels.
|Image courtesy of reits.com|
Recently, various hotel REITs have been on the move raising capital in the stock market.
This activity suggests that someone is in a buying mood. Actually, more than a few investors must be considering a significant purchase.
Since the beginning of 2011, varied lodging REITs have raised equity dollars in the public market. Summit Hotels Properties Inc. launched its IPO. DiamondRock Hospitality Co. and Chatham Lodging Trust completed secondary stock offerings. In January, DiamondRock made net proceeds of $149.6 million from selling 12 million shares of common stock. In February, Chatham netted total gross proceeds of $64 million from an offering of 4 million common shares.
Many people wonder what all this activity means for New York City. The increased activity can be seen as a prediction for the immediate future (and beyond) in the NYC hospitality industry. During 2011, expect even more hotel transactions.
Several hotels are bound to change hands soon in the Big Apple. Actually, the whole scenario comes down to common logic and wise investment practices. REITs will want to buy hotels at affordable prices in the present recovery period.
When an economy reaches its peak, values rise in accordance with the improvement. Investors want to be ahead of the crowd and save money in the bargain. Of course, REITs might have to pay down a degree of debt.
Yet once they are organized and ready, REITs will be active in the NYC lodging market. Recently, RLJ Lodging Trust filed IPO papers with hopes of raising about $550 million – a part of which will go to paying down debt. If the plan works out for them, the company would have a portfolio with 140 hotels.
Distressed properties are still on the market for low prices. Many NYC distressed properties, however, have been snapped up by savvy investors. Buyers do not want to wait too long and discover that they have missed an incredible deal. Obviously, NYC hotels are not cheap by most standards but they are well-worth any price. The market is a historically-sound one and even the luxury market draws throngs of investors.
Patrick Scholes, senior equity analyst, gaming and lodging, at FBR Capital Markets Co. Inc., explains the urgency felt by many investors.
“Many of these investors believe we are in the early stage of a multi-year cyclical up-cycle in lodging, and it’s certainly best in that scenario to get in early as opposed to getting in late. If you believe in the early scenario, that’s the sense of urgency to get it done now,” says Patrick Scholes from FBR Capital Markets Co. Inc.
Of course, Scholes is correct that lodging is a "cyclical type industry." With such industries, investors want to get in early during the recovery period. Within the first stages of an 'up' period, investors get opportunities to build their portfolio of assets. With attractive valuations and an industry with 12 consecutive months of year-over-year RevPAR growth, the timing is perfect for NYC investments.
Hotel brokers predict that New York City hotels will continue to perform better in occupancy and rate growth than lodging properties in other parts of the nation. CBRE Econometric Advisors projects that the New York area's occupancy rate will rise by 0.6% to 81% in 2012. The national rate will remain the same at 65.9 per cent. According to the research unit of CBRE Group Inc., the average price per room ($472,489) paid for Manhattan hotels in 2011 was already a 35% increase over the previous year's average.
REIT stocks have rebounded from their previous precarious state. REITs will regain their former fervour in the hotel acquisitions market – especially by the second half of this current year. According to Bradley Burwell, a CBRE senior associate specializing in hotels, REITs will be back in a "very heavy buying mode" by that time.
The CBRE report forecasts that the average daily hotel rate in the New York area will rise by 4.5% to $243 in 2012. Revenue per available room will increase 5.4% to $197. Both the national average room rate and revenue per available room will both rise by 3.8 percent.
NYC Hotel Purchases In 2011 Included:
Sherwood Equities has purchased a parcel of land in New York City. On May 25, the company announced that they have bought a NYC vacant development site in partnership with Fidelity Real Estate Group for more than $42 million. Located at 356 10th Avenue, the land is close to the West Side rail yards expected to be the focal point of the area's transformation into an expansion of NYC's central business district.
During the economic downturn, it seemed doubtful that the designated developer of the yards, The Related Companies, would go ahead with the multi-billion dollar development. A billion dollar platform would have to be built over the working rail yards. The platform would support the millions of square feet of office, residential, retail, and public space planned above it.
Currently, The Related Companies are proceeding with plans for the site. Stephen Ross, the company’s chief executive, is confident that corporate tenants will be interested in the commercial venture. Ross believes that companies will feel at home in this state-of-the-art, custom-built space.
In addition, New York City is on schedule to complete an extension of the No. 7 Subway line to 10th Avenue. This project will have a positive effect on the commercial potential of this project. Billions of dollars (public and private capital) will be invested in the immediate area.
The site can accommodate at least 556,000 square feet of commercial or residential development (or a combination of both types). Extra air rights can be bought for the location allowing up to almost 700,000 square feet of development. This unique parcel is situated at the epicenter of a dynamic area.
During the recession, land prices fell and the active pipeline of NYC commercial and residential projects almost came to a standstill. Yet all markets have bounced back and new construction is on again in New York City. Real estate experts predict that these developments will be economically feasible considering the current state of the market.
This region should see growth in the near future as well as the long term. The Sherwood and Fidelity purchase is another example of the renewed interest in NYC properties. Initially, real estate investor Gary Barnett had assembled this parcel of land before the recession.
At that time, Barnett had planned to build a lofty, mixed-use tower (more than 60 stories) designed by architect Steven Hall. During a period of economic uncertainty in 2010, Barnett returned the site to Barclays – the British bank holding almost $30 million senior mortgage against the property as well as other debt.
Sherwood and Fidelity's purchase of 356 10th Avenue might look like a premium to the parcel’s senior mortgage. Yet the partners are paying much less than Barnett's original investment.
Ryan Nelson - Sherwood’s senior vice president of acquisitions and development - described the deal, "We’re buying in at a very attractive cost basis that will allow us flexibility in our development plans.”
New York City hotels are no strangers to stylish fashions. New Yorkers, as well as visitors from around the world, show their passion for fashion during the "Superbowls of Fashion" held twice every year in the Big Apple. Top designers unveil their fall collections in February shows. Leading names in the fashion industry introduce their spring collections at the September event.
New York City Fashions
Everyone gets into the spirit of fashion in New York City. During Fashion Week 2011, the Empire Hotel served up fashion-friendly cocktails in their Lobby Bar. Several NYC hotels offer special nightly rates for fun-filled fashion days. The Big Apple is a fashion-friendly city.
Serving Up Fashion
During this summer season, expect hotel servers to step out in style at NYC hotels. Hospitality staff at the W New York – Downtown (the Wall Street area 'W' Hotel) will be wearing new tuxedo-style outfits. The W hotel chain has rolled out these fashionable styles for their hotel servers.
Probably, this hotel chain thinks that the fashions will add a little pizzazz to the 'meals and deals' cooked up in their establishment. Frequently, investment bankers make huge deals over business lunches at NYC hotels. The W chain has come up with chic and classy (and sexy) outfits for its hotel servers.
The tuxedo-look styles are considered to be a different take on the "little black dress." W's summer styles have received all kinds of feedback. Indeed, people have described the fashions in different ways - from comfortable and "not too formal" outfits to creative and elegant attire to "way too sexy for hospitality workers."
The outfits have been called "refreshing and relaxing styles." On the other hand, Guido Van Den Elshout, hotel operator in Hague and author of a hotelier blog, refers to the outfits as "looking a little too good" and believes that "hoteliers should not endanger their co-workers with such uniforms."
The designer of this 'talked-about' tuxedo style is Lyn Devon who has designed previously for Ralph Lauren. Six years ago, Devon started her first full Ready-to-Wear collection.
The W Hotel chain likes to support local talent and Devon fits the bill. As well, Devon's studio is steps away from their 58-story hotel. In addition, her factory is located in the Garment District. Whether or not you are a fan of the tuxedo–style outfits, one must admit that the fashions add a little more style to the NYC hotel scene.
And More Fashions In NYC Hotels…
The W Hotel chain is not the only hotel group wanting to make a statement with server outfits. Last winter, aviator-inspired doormen jackets showed up at the James in New York City. Previously, Narciso Rodriguez's designed minimalist uniforms for Gramercy Park while Vivienne Tam served up intricate fashion for the staff at New York City's Mandarin Oriental. A few server styles have received rave reviews in the past but just as many outfits have missed the mark. The summer months in NYC hotels will reveal this season’s fashion winners.
Although the recent recession slowed down travelers, they have returned to U.S. hotels during the current recovery period. Continuing from the trends in the first months of 2010, occupancy gains outperform room rates. The June 2011 Hotel Horizons® report by PKF Hospitality Research (PKF-HR) predicts that demand for U.S. hotel rooms will rise at least 4.9% in the present year.
Average Daily Room Rate
This increase compares to a smaller gain of 2.4% in average daily room rate (ADR). PKF is impressed with the current state of the American hospitality industry. After all, a high rate of unemployment, as well as housing issues, continues to be a challenge for many consumers.
Yet the U.S. lodging industry is looking strong in this recovering marketplace. The PKF forecast for the 2011 increase (4.9%) in occupied rooms and the STR (Smith Travel Research) 2010 reported rise (7.6%) in lodging demand indicate strong growth, In fact, such increases are far more than the STR long-term average annual demand growth rate (1.5%).
Of course, room rates have not kept pace with lodging demand. ADR growth spells profit for hotel owners and operators. Yet considering the continued demand, room rates might be in for a rise.
Competitive market conditions, however, might temper such increases. PKF predicts that only 12 of the largest U.S. hospitality markets will have above-average occupancy rates during the current year. By 2013, most U.S. markets will achieve more than their long-run average rate.
When local markets achieve this long-term average, rate growth will pick up its pace. Indeed, PKF-HR forecasts that room rates will rise 5.5% during 2012 and an additional 5.8% in 2013.
During the initial stages of an economic recovery, hotels are faced with a huge rise in the variable costs associated with an increase in occupancy. As well, the lack of pressure on salaries and wages add up to more labor costs for U.S. hotels. For every dollar spent on operate an American hotel, 46.6% goes to labor expenses.
With this present recovery, labor-related costs are dropping on a dollar-per-occupied-room basis. As a result, the reality is labor cost containment and employee productivity. When hotel managers control labor growth, they can handle any hotel revenue growth issues. According to R. Mark Woodworth, president of PKF-HR, hotels can achieve gains on the "bottom-line."
PKF-HR Hotel Horizons®
The PKF-HR Hotel Horizons® econometric predictions are based on Moody’s Analytics (Moody’s). PKF has adjusted its forecasts to reflect Moody's cautious mood about 2011. PKF-HR, however, is forecasting an 11.7% rise in unit-level net operating income during 2011. An even larger increase (17.9%) is predicted in 2012. Room rates will spur on RevPAR.
Initially, the recovery in the hospitality industry was limited to upscale properties. During 2010, RevPAR grew the most in luxury hotels. Yet in 2011, the recovery should extend to all sectors of the U.S. hospitality industry. Upscale hotels, however, will still experience the highest RevPAR rise at 10% during this current year.
During summer 2011, NYC hotels hope to accommodate more guests than ever before. As well, investors want to buy into New York City properties to share in the tremendous opportunities. A Priceline.com survey indicates that Midtown West hotels captured fourth position in a recent ranking for top Memorial Day destinations.
Memorial Day Statistics
Properties within Times Square and the Theatre District ranked in 14th place. Both areas have been active locations for new hotels over the past couple of years. Hotels on the Upper East Side ranked 17th and Midtown East made 30th place. Recently, several hotels have sold in Midtown East. Lodging properties in Manhattan, SoHo, and the Financial District came in 33rd in the Priceline survey.*
*The survey is based on actual bookings made though priceline.com for the holiday.
NYC Hotel Performance
Although certain metrics may be down, the NYC hospitality sector is performing well in this pre-summer period. New York's occupancy rate has dropped by 2.6% to 70.2 through March (year-to-date). The average daily rate (ADR), however, has increased 4.6% to $197.29. According to Smith Travel Research (STR), revenue per available room (RevPAR) climbed by 1.9% to $138.5. At year-end 2010, New York City occupancy rate was 81%, ADR ($232.60), and RevPAR ($188.38).
Best Performing Market
New York City is America's best-performing market. During the past year, 37 new hotels (5,638 rooms) have appeared on the NYC hospitality scene. STR/McGraw Hill Construction Dodge says that the Big Apple has the largest active pipeline of new hotels rooms in the country.
New NYC Hotels
As of April 2011, the city has 173 new hotel projects (20,650 rooms) slated for construction. Currently, 53 hotels (6,712 rooms) are under development in this global center. STR says that the existing supply of hotels is 538 hotels (99,406 rooms).
Supply and Demand
According to STR, hotel supply rose 6.7% compared to demand at 3.9% through March 2011. Last year, supply increased 4.8% and demand rose 10%. STR forecasts a 5% drop in occupancy during the second quarter of 2011. Average daily rate will increase 3.6% to $235.24 and revenue per available room should drop to $190.76.
During this year, several new rooms will enter the NYC market. STR projects a decline of 3.5% to 78.2% in New York's occupancy rate by the end of 2011. ADR will rise by 4.9% to $243.95.
NYC Hotel Transactions – June/July 2011
NYC Hotel Sales
An ever-increasing number of guests, as well as intense demand by investors, is driving the sales of NYC hotels. Financing is available for publicly traded real estate investment trusts as well as financing by national and regional commercial banks and collateralized mortgage backed lending. Therefore, properties continue to trade in New York City.
On February 25, 2011, Kelsey Grammer, television personality, wed his fiancé, Kayte Walsh, at NYC's Longacre Theater. Later, the couple greeted 150 guests at a lavish reception in the Grand Ballroom of the world-famous Plaza Hotel. At a cost of $100,000, the reception offered superb dining with ginger prawns, filet mignon au poivre, and slow-roasted turkey breast with chorizo stuffing.
|Image courtesy of fairmont.com|
The wedding cake was a showstopper with white and cream sugar flowers. With a culinary team led by Executive Chef Chris Harkness, The Plaza organizes menus for luxury weddings, fundraising galas, and corporate events. The hotel serves excellent cuisine including fresh produce from Great Performances’ own Katchkie Farm. The Grand Ballroom can handle 600 people for an opulent reception or 500 for a sumptuous banquet. The Grammer/Walsh wedding is one of the latest events to be held at the 4800 sq ft Plaza Hotel's Grand Ballroom.
Located at the intersection of Central Park and Fifth Avenue, the 20-storey Plaza Hotel, a luxurious establishment, has been the center of world-class events. This hotel is an elegant icon and treasured landmark of New York City. In 1969, The Plaza was awarded landmark status by the New York City Landmarks Preservation Commission. In 1978, the hotel was designated as a National Historic Landmark (NHL). The Waldorf-Astoria is the only other NYC hotel to be designated as a National Historic Landmark.
Over the past century, The Plaza has seen its share of well-publicized events. In February 1964 during their first visit to the US, the Beatles stayed at the Plaza. On November 28, 1966, in honor of the publisher Katharine Graham, the writer Truman Capote hosted the "Black & White Ball" in the Grand Ballroom. In September 1985, ministers of developed countries met at the Plaza to discuss finance issues. They affirmed their agreement by signing the Plaza Accord. As well, the finance ministers of the United States, Japan, West Germany, France, and Britain signed an agreement to bring down the price of the U.S. dollar against their currencies.
In 2008, CPS Events, a partnership of Great Performances, a NYC event and catering company, and Delaware North Companies, one of the world's top hospitality and foodservice providers, restored the hotel's ballroom to its original opulence but also added contemporary touches. CPS Events has upheld the standards of culinary excellence and personalized service that has earned the Plaza Hotel its prestigious reputation. The partners have signed a 25-year lease with Elad Properties, owner of The Plaza, to operate and manage the Grand Ballroom as well the Ballroom Foyer, Terrace Room, and new meeting spaces.
The Plaza Hotel has 282 hotel rooms and 152 private condo units. In May 2007, a new apartment in the Plaza Hotel was sold for a record $50 million. The Plaza Hotel is a prestigious place to live or party in New York City.
Investors share an optimistic view about the future of the U.S. hotel sector. Yet no one can deny that challenges are part and partial of an economic recovery period. The July 11 ALIS Summer Update's 'View from the Boardroom' event shed light on the present state of the U.S. hotel industry.
Quorum Hotels & Resorts
Tony Farris, CEO of Quorum Hotels & Resorts, explained about industry expenses. Monty Bennett, CEO of Dallas-based Ashford Hospitality Trust, said that brands helped reduce costs during the recession. Yet Bennett recognizes a different scenario in the midst of the current rebound.
At present, brands favor increased costs. A post-recession economy differs considerably from a pre-recession period. Although the US is in recovery mode, the rebuilding process is a difficult one.
Yet Ashford's affiliate managers keep costs under control to a greater degree than brand partner officials. Ashford is a real-estate investment trust with direct investment in 127 hotels (26,500 guestrooms). This Hospitality Trust, however, is prohibited by law from operating the hotels. Bennett says that keeping costs down is Ashford's top priority.
Quorum Hotels and Resorts, a Dallas-based management and asset-management company, specializes in full-service hotels. CEO Farris listed 'human resources' as their biggest cost-containment challenge. Farris notes that the decades of entitlement with free meals and automatic pay increases are a thing of the past. In his opinion, today's industry should focus on strategic rates and future sales as well as contained costs.
Choice Hotels International
Yet another industry leader, Steve Joyce, president and CEO of Choice Hotels International, disagrees with Farris and believes that cost containment in cloud-based technology is a different matter.
Joyce explains his idea, "Then computing costs come down because you can change everything when a cloud-based system is in place."
Joyce added that the cost of electronic distribution channels should experience a decline. Marketing expenses, however, will not drop for such channels.
Yet all executives agreed that the value proposition is more important than ever within the hospitality industry. Price and location determine business growth for hotels. Value will be expected at every level of the industry.
Loyalty programs will play a part but they will not be the only determining factor in a hotel's success. Location will always outshine such programs. Location, location, location,… is one of the prime reasons behind customers' loyalty to certain hotels. Although loyalty programs have a place in the hotel industry, these initiatives are expensive for owners and come with difficult-to-contain costs.
Joyce outlines a few issues experienced by the current industry.
“From a rate side, we’ve got a market-mix problem. We’ve got way too many rooms occupied by people being driven through demand channels that are not driving rate for us. We’ve got to get corporate America comfortable paying (higher rates),” explains Steve Joyce, CEO of Choice Hotels International.
According to Joyce, an ever-increasing number of travelers are booking rooms with handheld devices. Younger travelers drive this trend. The younger set makes travel reservations at a moment's notice rather than booking in advance. Entrepreneurs recognize the need for market to this influential group. Generally, mature travelers prefer to plan trips ahead of time.
Although Olivier Poirot, CEO of Accor North America, points out customers' unpredictability. Defining the customer experience is a must for success. Accor’s Motel 6 brand will concentrate on price value.
Even in upscale hotels, value is a huge factor in fundamentals. Industry leaders see group business as the biggest booking challenge. Yet many elements have to be considered in the hospitality sector.
Transient corporate business holds tremendous potential. While it could take years to promote group rate, transient travel can make a difference in the present. Actually, transient business has been on the upswing in the last couple of years.
Record-high occupancy rates are a result of increased corporate trips. Even with the current high unemployment rates, lodging demand has reached new numbers. Companies might not be hiring new workers but employers are sending their employees on business trips.
Hotel owners want to see peak profits like in 2007. The hotel industry has the potential to achieve that goal. Yet to reach these levels, average daily rate (ADR) must move and costs should be contained at every level. Of course, choosing the correct target market is the key to reaching peak performance. Although 2014 and 2015 look promising for the U.S. hotel industry, technology cannot come between hotels and their customers.
Image courtesy of alisemsreg.com
Trump SoHoTM, the 46-storey luxury hotel opened in April 2010, offers its guests a little more than other NYC hotels. Of course, this upscale hotel has an impressive outdoor pool with blue mosaic Italian tile and a spectacular waterfall. Yet its attractive pool is not the hotel's most distinctive feature.
Anyway, the view from the pool at the James New York is a more amazing vista. As well, other New York City hotels have outdoor pools either at present or in the works. Gansevoort Park Avenue is another splendid example of a hotel with an outdoor pool offering a view of the Empire State Building.
Trump SoHo™ has more two-bedroom penthouse suites than any other hotel in New York City. Recently,
|Image courtesy of condominiumcentral.net|
Trump SoHo™ announced 11 first-class oversized penthouses offering expansive views. Ten out the eleven elaborate penthouses offer gorgeous two-bedroom suites. Of course, each sensational suite will have its individual characteristics but the overall theme would reflect luxurious living.
The new top-of-the-line penthouses are bound to attract attention. The suites are supposed to stand out from others in Manhattan offering unique style in a city renowned for its luxury market. At present, New York City tourism is in a better position than the industry has seen since 2009. No doubt, tourists will check out the Trump SoHo™ and the other luxury NYC hotels in 2011.
In fact, all types of NYC hotels will be popular with tourists in the coming year. Although the Trump SoHo™ and the other opulent hotels offer impressive accommodations, not all tourists can handle the high rates. Yet the NYC hotel market has a hotel room to suit every budget and individual taste. Whether you plan a casual and informal stay with young children, an extravagant romantic weekend with your sweetheart, or a vital business meeting, there is a hotel waiting for you in New York City.
If you want to spend your time in New York City at the Trump SoHo™, you will have the pleasure of staying in the first luxury hotel in Downtown Manhattan. The sophisticated hotel has 391 elegant guestrooms with just 12 rooms on each floor. Trump SoHo™ offers superb views of the Manhattan skyline and the Hudson River. Two penthouses on the 43rd floor give guests a choice of view.
The southwest-facing suite provides a Hudson River sunset. The north-facing suite has a view of the Empire State Building. Guests can enjoy several indulgences such as first-class dining at Quattro Gastronomia Italiana, two levels of luxury spa services with The Spa at Trump®, and unsurpassed personal service with the Trump Attaché. Another unique feature of the Trump SoHo™ is that the hotel has the only authentic luxury Turkish hammams (Turkish baths). Two-bedroom penthouse suites begin at $2,800 per night.