The NYC hotel industry is a strong sector. Considering that revenue per room, hotel occupancy, and room rates are all on the rise, investors in NYC hotels within recent years have made a smart decision. Past performances have shown outstanding strength in this area of investment. According to Marc Magazine, managing director for hospitality at the global commercial real estate firm Savills, buyers in 2011 were purchasing NYC lodging properties.
Based on Real Capital Analytics data for January-March 2012, three Manhattan hotels sold for a total of $338.4 million. The current average price per room in New York City hotels is $402,355. The Big Apple's hospitality sector maintains strength. Yet the industry has gone through that feverish pitch stage which always follows a recovery. Consider that the financial breakdown of 2008, led to a bottoming in 2009, and consequently, a recovery during the first months of 2010. Bernard Schwartz, managing director of hotels and lodging assets at Steven Kamali Hospitality, believes that NYC hotel investments during 2011 showed "a summation of the pent-up demand from the recession."
Presently, revenue, room rates, and occupancy are on the increase – even with the consistent rise in the number of guest rooms in New York City. According to PricewaterhouseCoopers, Manhattan hotel occupancy rates increased to 86.6% in the last quarter of 2011 – a rise of 3.7% from the same time in the previous 12 months.
Even though the first quarter is traditionally a slow time of year, NYC's Economic Development Corporation notes that Manhattan occupancy rates for January-March 2012 was 71.7% - a 7% increase over the same time in 2011. In fact, the consistent high occupancy rates have allowed Manhattan hotels to increase their nightly room rates. PricewaterhouseCoopers reports that average daily rates rose by 2.4% to $315.73 between the last quarters of 2010 and 2011.
During the past two years, hotel investors witnessed historically low capitalization rates measuring the rate of return on a real estate investment. Buyers were willing to pay more for properties with less income. Investors hope for a rise in revenues.
The sale of the Union Square W Hotel with its specific debt issues illustrates that point. When its Dubai-based owner went into foreclosure, the property went to auction. Despite the hotel’s debt, several investors put in a bid. These parties were willing to accept that cap rate of a very low number. The investors had faith in the future of the property and viewed it as a "once-in-a-cycle opportunity." Current NYC hotel prices are going through a “more normalized” stage.
During 2012, New York City hotel construction is expected to continue with almost a dozen properties to come into view by the end of this year. According to PricewaterhouseCoopers, developments include seven properties (900 rooms in total) in Lower Manhattan. An additional 24 hospitality properties are planned for 2013 including Extell Development’s 487-room Hyatt Times Square and the McSam Hotel Group’s Holiday Inn Manhattan Financial District at 99 Washington Street.
The NYC hotel investment sales market is much stronger than anywhere else in the US. Analysts expect big hotel sales (especially deals involving foreign purchasers) to continue in 2013. Sean Hennessy, CEO at Lodging Advisors, a Manhattan-based industry consulting firm, says that various properties might soon hit the market in hopes of attracting attract overseas investment.
In March, the Dubai Investment Group put the 509-room Jumeirah Essex House on Central Park South up for sale. The Wall Street Journal believes that the price could reach an amazing $1 million per room. As well, the Helmsley Park Lane Hotel on Central Park South could go on the market. In 2008, this hotel was up for sale but never changed hands.
During April, the New York Post reported that the Sahara Group, an Indian conglomerate, would purchase the Plaza Hotel for $600 million. The price includes $400 million for the building’s hotel component (almost $1.5 million per room), or in other words, the highest per-key trade in the history of NYC hotels. In March 2012, the Hotel Williamsburg was sold to King & Grove Hotels for $33 million ($520,000 for each guest room.) Several NYC hotels have changed hands in the last 18 months. Regardless of the price, NYC hotels are considered a safe investment for local and international buyers.
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In 2011, Manhattan hotel investments rebounded quickly and a similar trend is expected to happen in 2012. Although it must be noted that NYC hotel investment is more than the latest trend. The Big Apple has always been a consistent market for the hospitality industry. CBRE's Winter 2012 Snapshot on the NYC hotel market pointed to a dynamic and well-performing sector.
According to Bradley Burwell, senior associate, CBRE Hotels, fundamental lodging performance will maintain its strength. Even though over 4,100 guest rooms were added to Manhattan during 2011, occupancy rates remained the same at 84 percent. New York City can continue to absorb the new supply of extra units.
CBRE reports that limited-service as well as focused-service hotels flagged by popular brands have performed well in recent months. Limited-service hotels make up 20% of the inventory - compared to 17% of inventory in 2006. During the past few years, performance for limited-service hotels has outperformed full-service hotels with current occupancy showing an increase for full-service hotels. The Average Daily Rate (ADR) gap has fallen 5% (from 23% to 18%) between 2007 and 2011.
Additional CBRE findings include:
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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:
The demand for hotel rooms in New York City is on the rise. Several office buildings in the Big Apple are being converted into lodging properties. The former 133,000 square-foot office building at 28th Street and Broadway has just undergone a major transformation into a chic hotel.
In 2007, this Madison Square Park area property was in poor condition. During April 2012, however, the building reopened as the 168-room Parisian-style property – the NoMad Hotel – at 1170 Broadway. The stylish conversion (with interior design by Jacques Garcia) was a group venture with the Sydell Group, Ron Burkle and Square Mile Capital. The NoMad Hotel (and a gourmet restaurant run by Daniel Humm and Will Guidara of Eleven Madison Park) should attract visitors to this rebuilt New York City neighborhood.
Around six similar renovations are on the go in the Big Apple – especially in Midtown South and the Financial District. Millions of square feet of new office space are being added through the new World Trade Center development. According to William Geiler, Highgate's executive vice president of development and acquisitions, Highgate, the Carlyle Group, and Trabuco Associates plan to change a landmark office building at 170 Broadway into a 245-room extended-stay hotel.
Recently, the New York-based GB Lodging bought 5 Beekman St. - an abandoned 19th-century building with a stunning atrium in the center of the Financial District. The company plans to convert the property into a 297-room hotel with 90 condo residences.
Bruce Blum, president and co-founder of GB Lodging, explains the reasoning, "Given the location by downtown, near the 9/11 memorial, across the street from City Hall Park, a block-and-a-half from Fulton Street metro hub, it's a transitioning neighborhood."
With their central locations and commercial zoning, older office buildings have a definite appeal for NYC hotel developers. Yet for years, investors had wondered about the best use for aging office properties. Generally, the buildings were turned into rental apartments or condos. The current trend, however, to turn offices into hotels is revitalizing areas of New York that lack vibrancy after work hours and on the weekend.
The Big Apple is alive with new hotel projects. Tourists and corporate travelers are driving rates and occupancies within the lodging sector. According to CBRE Econometric Advisors, the city added 4,100 guest rooms in 2011 to its hospitality industry. The NYC hotel sector is not expected to lose any ground in the present year.
Within the same neighborhood as NoMad, Marriott International Inc. plans to purchase the century-old Clock Tower building and begin another hotel conversion. In addition, Felcor has bought the Knickerbocker Hotel (now an office building) near Times Square with plans to bring the property back to its original style.
As well, the Refinery, a 197-room hotel (complete with rooftop bar) on 38th Street between Fifth and Sixth Avenues, should open in autumn 2012. The Aini and Vaid families (with Highgate Hotels as a consultant) will convert the former hat factory (and later, office building) into a splendid hotel.
Obviously, office conversions are not easy projects. The buildings have larger floor plates (not ideal for hotels) and institutional hotel brands prefer traditional layouts. Yet Christina Zimmer, principal in charge of hospitality architecture at Stonehill & Taylor (architect and design firm for the Refinery), gives one reason why hotel developers choose office building for conversion purposes,
"You end up with some quirky layouts. You're getting a slightly different product, rather than something cookie cutter," states Zimmer.
Despite all the hotel openings, industry experts believe that the demand for NYC guest rooms will still exceed the present supply. According to the latest projections by CBRE Econometric Advisors, the NYC hotel occupancy rate in 2012 should rise by 0.6 percentage points to 81%. The national rate, however, should remain the same at 65.9%. The average daily rate should also rise by 4.5% to $243 in 2012. Manhattan needs even more hotel rooms.
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Although specific sectors in the U.S. hotel industry might have no funding or sufficient demand to justify further development, New York City has a record-performing tourism market with room for more growth. Manhattan is experiencing a building boom but a certain city block – Herald Square - is moving beyond the norm to an even higher level of success. Developers are interested in this Midtown block because the construction logistics are right for demolition and redevelopment.
Best Western Plus New York City Herald Square
Best Western developers, LeTap (hotel investment, management, and development firm) recognized a superb setting in the Herald Square market. This prime location has an unparalleled view of the Empire State Building. Views to the East are unobstructed and the hotel is at least four to five stories above the structures to the south on 35th St. As well, Bryant Park and Times Square are close to the building.
“We wanted to be close to Herald Square, and this is one of the only spots in the area with low-rise buildings, which are easy to demolish and rebuild ground-up,” explains Jaz Patel, President of LeTap.
Patel did not reveal the plot's sale price. Yet despite the present competitive investment climate, Patel admitted to a quick on-the-spot deal with the owner. After purchasing the plot, LeTap* bought out the building's four retail tenants. LeTap made a significant investment in this hot hotel market – but in the largest concentration of guest rooms under construction on one block.
Other lodging establishments including The Strand NYC, Hampton Inn Empire State Building, the Morgans Hotel, and Setai Fifth Avenue, as well as a Comfort Inn on 35th St., can be viewed from the Best Western’s rooftop garden. Although Patel must ponder the possibilities of returns, there is little need for concern. Recently, the neighboring Hyatt Place sold for almost $77 million.
The 17-storey, 94-room Best Western, will feature five rooms on Floors 16 and 17. Other floors will have six guest rooms. The NYC standard guest accommodations offer 200 to 220 square feet per room at a midscale but competitive rate (about $225).
Patel notes, “Our target guests are going to be leisure; even in Long Island City, our guest base is probably 70 to 80 percent leisure.”
Although space is at a premium, the common area will have a bar and lounge with flat-screens TVs on the ground level and doors leading to an outdoor patio. The basement level will host breakfast, business, and fitness areas. The building features the dramatic contrast of glass in the front looking through to brick in the back.
“Best Western was the first, and really only, brand we considered. Given the cost of their membership fees, there’s really no better deal to develop in Manhattan from a franchise perspective.” ~ Jaz Patel
*As well as having a presence in Midtown, LeTap operates a Best Western property across the East River in Long Island City, Queens.
NYC Hotels Under Construction - Recent News
Although hotel development and increasing rates will stabilize at some point, this booming Manhattan market shows no sign of any slowdowns in the foreseeable future.
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The current New York City hotel construction scene bears no resemblance to the state of the industry during the recession. Various investors (management firms, private equity companies, hedge funds) are gaining ground in the NYC hospitality sector during 2011. New York City hotel investment is no longer just for a few primary real estate investment trusts.
Hotels in the Big Apple are been built at an unsurpassed pace. Indeed, over 50% of the hotels planned for this year have already opened in New York City. Several openings were delayed but still managed to be ready in either spring, summer, or early autumn. Additional hotel construction will continue in late 2011 and into the New Year.
NYC Hotels – Open for Business – 2011
The magnificent Mondrian New York opened on February 2011.
The Four Points by Sheraton Long Island/Queensboro Bridge was expected to open on March 3. Although not a surprise for a Starwood hotel, the hotel opened later on April 28.
Aloft Brooklyn's opening was delayed first from March 31 to April 31. The actual opening date was June 9.
Dream Downtown was supposed to open on Memorial Day. The hotel's opening was June 13.
The ever-changing Portland Square Hotel – Sanctuary Hotel – reopened (for the most part) towards the end of June.
Like Hotel Americano, the Nolitan opening came after many delays. The Nolitan at 30 Kenmare Street opened in July after being postponed nine times.
Located at 1141 Broadway, Robert "Toshi" Chan's Flatiron Hotel opened towards the end of August. Chan and creditor Long Island Bank had been discussing this deal for a while before the opening.
The Hyatt 48 Lex was really expected to open in April but the actual date turned out to be August 29.
Situated at 518 West 27th Street, the Hotel Americano designed by Enrique Norton opened in September – following several delays. Originally, a spring opening had been planned for this Chelsea property.
Late 2011 Openings and Possibilities
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Successful companies have to make the right decision. They must take the most profitable direction – whether that means buying, selling, or holding property. Recently, there is much discussion about if REITs are overpaying for real estate. According to reports from the latest NYU Hospitality Conference (June 5-June 7, 2011), private equity is pursuing different deals than REITs.
Historically, REITs focus on more stable properties. Of course, private equity can take risks and buy properties in need of repositioning.
U.S. hotel owners are seeing an increase in corporate travel while the number of leisure guests is not breaking any records. Generally, room rates and occupancy levels are on the rise. Yet not every hotelier across the country is raking in massive profits.
Of course, various high-profile hotel companies (Marriot, Hyatt) are showing improvement. Other hotel owners, however, have faced bankruptcy or foreclosure in recent years. New York City hotels are seen as a smart investment in an established market.
If entrepreneurs want to determine a company's risk for bankruptcy, they can use the Altman Z-Score (a formula developed by New York University professor Edward Altman in 1968). The Altman Z-Score measures varied aspects of a company's financial health - working capital, total assets, total liabilities, market capitalization, sales, retained earnings, and earnings before interest & taxes (EBIT). This measure can predict if the company will go bankrupt within two years. According to Investopedia, the Altman Z-Score has been 72% accurate in its predictions.
Usually, companies with a Z-Score above 3 are considered safe and have little risk of bankruptcy. Businesses with a score of 1.81 or lower are seen as distressed properties in danger of bankruptcy. The middle range is a gray area.
Of course, the Altman Z-Score is not the only indication of a company's financial state. The Z-Score does not come with any guarantee. Yet potential buyers have reason to be concerned about hotels below the safety zone or properties with a year-after-year declining score.
Starwood Hotels, a dynamic presence in the NYC hospitality industry, as well as elsewhere, stayed at a reading of 1.84 in the trailing 12 months. This measure puts Starwood Hotels within the gray area and not at risk for bankruptcy. Starwood operates hotels under several brands such as the St. Regis, W, Westin, Le Meridien, Sheraton, and Four Points.
On July 28, Starwood will release its financial results for the second quarter of 2011. Several analysts expect Starwood to announce a profit of $89.6 million (46 cents per share) on revenue of $1.41 billion. This profit would compare with last year's earnings of $114 million (61 cents per diluted share) on revenue of $1.29 billion. During April, Starwood announced that quarterly revenue exceeded expectations and increased by 9.2% to $1.3 billion. Luxury travel was behind the rise in profits.
Despite turmoil in North Africa and the Middle East and the earthquake in Japan, worldwide RevPAR (revenue per available room) rose 10.4 per cent. Within North America, the increase amounted to 11.1 per cent. RevPAR, a key metric in the hotel sector, multiplies an establishment's room rate by its occupancy rate. Within recent years, RevPAR has been lower as travelers decided against high-priced hotel rooms – even in luxury properties.
Starwood offered a better full-year profit guidance ($1.60 to $1.70 per share). Analysts had predicted these profits. Starwood CEO says that the outlook for the rest of 2011 looks promising for the company.
Wyndham Worldwide (WYNR)
With a Z-Score of 1.15, Wyndham ranked just inside the risky area. Yet Wyndham shows improvement from last year. Wyndham operates several hotel brands including Wyndham (such as Wyndham Garden Times Square South Hotel), Ramada, Days Inn, Super 8, Howard Johnson and Microtel, as well as other properties. On July 27, Wyndham will release its 2011 second-quarter results.
Industry analysts expect a profit of $95.4 million (56 cents per share) on revenue of $1.05 billion. Last year, the company's earnings came in at $95 million (51 cents per share) on revenue of $963 million. Recently, Wyndham saw a 44% increase in net earnings due to increased revenue in all business categories.
As of March 31, 2011 (the end of this year's fiscal quarter), Wyndham earned $72 million (41 cents per share). Excluding charges, its profit was 44 cents per share. This figure topped expectations by 4 cents. Revenue increased 7% to $952 million – almost $18 million shy of analysts' predictions. Wyndham's lodging showed a RevPAR rise of 7.4%.
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Investors are willing to pay record prices for NYC hotels. Of course, the economy is recovering – although not at a quick pace. Yet economic improvements are occurring at a slow and consistent rate.
According to research firm Real Capital Analytics Inc., hotel prices rose to almost $185,000 per room during the first quarter of 2011. Five years ago, values were at a peak - $153,000 a room – but dropped 37% in 2008. Current record prices being paid by investors for U.S. hotels, however, might be outpacing gains in room rates and stays.
No doubt, this year's price increases are due to the rise in upscale hotel transactions as well as other purchases by real estate investment trusts (REITs) - especially in urban centers. At present, occupancy and room rates continue to climb – although the gains do not match the current prices for several full-service hotels.
Fundamentals are showing improvement. On the average, asset prices have affected fundamentals. Yet the current economy is not in 'peak' mode but the market is doing well under the present economic circumstances. Industry experts would prefer, however, a quicker pace of economic recovery.
During September 2010, The Hilton Garden Inn Chelsea in New York City sold for $68.4 million. Three years earlier, this hotel had been listed at $55 million. The 2010 purchase price was 24% higher than in 2007.
In fact, values have even risen in smaller markets outside key centers. At the recent New York International Hospitality Industry Investment Conference, Barry Sternlicht, founder of real estate investor Starwood Property Trust Inc., explained, "Pricing is pretty aggressive. Even for generic hotels you get 20, 30 bids.”
In April 2011, FelCor Lodging Trust Inc. agreed to buy the NYC boutique hotels – Morgans and Royalton - from Morgans Hotel Group Co. for $140 million (almost $500,000 per room). Texas-based FelCor looks for hotels that "purchased at a substantial discount to replacement cost, will earn a 10 percent cash yield within a short time."
According to Real Capital, daily room rates averaged $94.05 during 2010. Revenue per available room (RevPAR) was $42.40 – below the 2008 peak of $106.65 and $54.42. RevPAR is an industry measure of occupancy and rate.
Towards the beginning of 2011, Jones Lang LaSalle Inc.’s hotel investment-services unit predicted that hotel sales could increase up to 25% this year. Due to the extraordinary demand from REITs (over $1.6 billion in hotels bought in first quarter), values have risen these past few months. The recent REIT statistics reflect 44% of trades and five times the total of REIT purchases during 2007 – a peak year for hotel investment.
REITs have their sights on full-service properties in urban centers. This week, Pebblebrook Hotel Trust agreed to buy stakes in six New York boutique hotels for $152 million. Pebblebrook is proceeding with this arrangement as part of a joint venture with Denihan Hospitality Group.
Within the top 25 U.S. markets, occupancies rose to 63% in the first 2011 quarter. According to Smith Travel Research Inc., occupancies came in at 60% during 2010. Stays at expensive hotels have increased to 67% - up 4% from last year.
In a few instances, hotel values are higher than replacement costs. The high values might indicate more new hotels in the near future. In New York City, hotels trade regularly at $200,000 a room over the cost of replacement. Hotel demand is tied to the general state of the economy.
Many hotel buyers believe that high prices are warranted if there is potential for future growth. As well, investors tend to be pleased with prices if lower than the cost required to build the property at that location.
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The Pennsylvania-based fourth-generation Korman family is planning an extended stay in New York City. This established company has built thousands of homes, apartment buildings, and commercial properties. The Kormans grew up in a Fort Washington home designed by Louis Kahn - renowned architect of the 20th century.
The family has been influenced by acclaimed architects. In their own right, the Kormans are making an impact on modern architects. Presently, the real estate family is doing a $100 million upgrade on four of their AKA extended-stay
brand hotels in Manhattan. The Kormans acquired these hotels between 2004 and 2007.
The AKA extended-stay brand provides unique accommodations. These Korman properties are upscale NYC hotels suited for long-term residence. The average guest stays from over three weeks to three months. Kormans ensure that they continue to experience comfort, style, and class during their stay.
Kormans extended-stay hotel accommodation offers subtle style - not the 'hip' atmosphere of boutique hotels. This brand does not resemble the Four Season hotels or Ian Schrager properties. Indeed, Larry Korman, partner at AKA, insists that his company is going for a completely different design than other hotels. When planning a redesign, however, Korman ensures that the plan works for the surrounding neighborhood.
AKA Sutton Place
The 76-suite AKA Sutton Place might appeal to mature guests. Its lobby features oak paneling. In fact, Korman hired Meyer Davis Studio to change the former Il Valentino restaurant into an oak-panel-accented cafe and lounge. The pink-tiled pool was repainted in a spa-like desert color. Pre-War Sutton Place has a classic and luxurious look with a fresh appeal.
AKA Central Park
Located on 58th Street, AKA Central Park, a 134-suite hotel, has a more modern décor suited to the young business person. Its redesign was overseen by HLW International in collaboration with Studio IntraMuros, AvroKO, Steven Learner, and Nicholas Cardone. The guest-only bar feels like a contemporary cigar lounge with two gas fireplaces as well as mustard and brown asymmetric furniture by Ligne Roset. A-list celebrities prefer AKA Central Park to pubic bars and clubs.
LED lights in primary colors are used to accent specific walls. On the penthouse floor, the lights between the doors can be changed to suit a guest's whim. The lobby has video artwork (depicting jellyfish ballooning and deflating) designed by Mr. Korman. The gym features a Monika Bravo six-panel video installation depicting reflections on water and creating the illusion of natural light. Patinaed stainless steel is a standard finish in this cool hotel.
AKA Times Square
In cooperation with architect Pieo Lissoni, Mr. Korman is building a two-story sky lounge on the penthouse level across from the site of the dropping of the New Year's Eve ball.
Extended Stay Brand
Since Manhattan is a strong market, all hotel categories can thrive in this area including extended-stay hotel brands. Of course, people must expect hotel rates in accordance with their expanded services and spacious accommodations.
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