Hoteliers stay positive despite New York slump

Influx of available rooms and currency woes loom as concerns for city's industry, Sydney Ember from the New York Times News Service reports.

On 41st Street near Times Square, a Hyatt Place hotel is under construction. The shell of a Hampton Inn sits one block to the west. Nearby, scaffolding heralds a new Holiday Inn.

For years, New York City's hotel sector has been growing. But a sustained strengthening of the dollar and a weak global economy could curb tourism, which could ultimately make New York a less attractive market for developers and investors. Rising interest rates could also make hotel construction and renovation too expensive.

More immediately, analysts and industry experts are scrambling to explain the New York market's abysmal January performance. The average revenue for available room - the standard measure of hotel performance - fell sharply by 12.9 percent, according to STR, a leading hotel research company. Average occupancy fell 4.7 percentage points to 68 percent and average daily room rates decreased 8.6 percent, to $190.16 from $208.11.

For the month, New York underperformed almost every other top market, including San Francisco, Los Angeles and Boston.

"It is concerning," said Patrick Scholes, a senior lodging and leisure equity analyst at SunTrust Robinson Humphrey. "I have a pretty clear crystal ball for the first half of the year, and it looks weak."

New York is particularly dependent on international tourists, the segment most affected by a strong dollar. Last year, 12.2 million, or roughly 22 percent, of the 56.4 million visitors were from outside the United States, according to NYC & Co, the city's tourism promotion agency.

Analysts agree that international tourism will most likely be affected if the dollar remains strong. But a clearer picture will emerge in the summer, since international visitors tend to plan trips to the US months in advance.

On earnings calls in February, hotel companies, including Marriott International, Hilton Worldwide Holdings and Hyatt Hotels, expressed concern about the effects of foreign exchange rates on New York tourism. "Currency will hurt arrivals in a place like New York almost certainly," said Arne Sorenson, chief executive of Marriott.

Most hotel analysts are wary of declaring the start of a worrying trend. The Super Bowl and a big convention resulted in unusually strong figures for January 2014, so this year was bound to be worse in comparison. January is also generally a weak month for the hotel sector because it comes after the Christmas and New Year holidays.

Although current economic conditions, including the sliding euro, may have been a small factor in the recent downturn, looming larger over the industry is an influx of available rooms.

From 2009 to 2014, New York added hotel rooms at a rate of roughly 4 percent a year, according to STR. Last year, developers added 4,348 rooms to the city's existing 108,592 rooms and there are more on the way.

Currently, 14,272 more rooms are under construction in the city. Yet demand decreased 1.8 percent in January, even as hotels across the city reduced room rates to entice customers.

"I don't think there is any hotel market on the planet where they have added so much new supply," said Thomas McConnell, executive managing director of the global hospitality group at Cushman & Wakefield, a commercial real estate company.

Low interest rates helped propel the building boom by driving down the cost of construction. Rising rates would make investing in real estate, including hotels, more expensive.

Despite the colliding economic and operational forces, New York hoteliers are optimistic. "The best way to get your money back is investing in New York - it never fails," said Nur Ercan, the general manager of Marmara Park Avenue, part of the Turkish brand's global outpost of hotels. The luxury hotel, in a historic building at 114 East 32nd Street that the company bought in 2012, is scheduled to open this spring and will have 128 rooms, including three penthouses. Marmara spent roughly $100 million on buying and converting the property.

For now, investors, particularly Chinese companies, are still pouring money into the New York hotel market.

The Langham Hospitality Group, which is based in Hong Kong and operates a 214-room hotel in midtown, is looking to develop a second New York property in SoHo, Chelsea or another upscale area. "New York, in our mind, will continue to be a very, very important hotel market for us for all of our brands," said Phil Keb, Langham's executive vice president for development for the Americas and Europe.

There are signs that the hotel boom may be cooling off. The glut in available rooms means companies are increasingly looking to turn hotels into other types of commercial real estate, like condominiums and multifamily properties, said David Loeb, a senior hotel research analyst at Baird, a financial services firm. The Anbang Insurance Group of China, which bought the Waldorf-Astoria hotel in Manhattan for $1.95 billion from Hilton Worldwide Holdings in October, said it planned to convert part of the hotel into luxury condominiums.

"The prices you can get for those kinds of properties are much, much higher," Loeb said of condominiums and multifamily real estate. "I think we have passed the point, given current conditions, where it makes sense to build a hotel when you have a piece of land."

(China Daily 03/07/2015 page10)