Supply growth, illegal hotels among NYC concerns

NEW YORK—The New York hotel market is poised for long-term success, according to Jenna Finkelstein, senior consultant, CBRE Hotels. “New York City is one of the top destinations in the U.S. for leisure, group and business travel. The fundamentals remain strong despite recent years of ADR loss. Market occupancy is continually above 85%, approaching 87%. It wasn’t until 2003 that the market continually achieved average occupancy over 80%.”

In the near-term, things have not been going well, as by year-end 2019, NYC hotels are forecast to see a RevPAR decrease of 4.1%. This is the result of an estimated decline in occupancy of 1.5% and a 2.7% loss in ADR. Comparatively, the national RevPAR projection is a 0.9% increase.

In NYC, upper-priced hotels are forecast to suffer a 2.6% loss in ADR and a 1.1% decrease in occupancy, resulting in a 3.7% RevPAR decline. Lower-priced hotels are projected to experience an ADR decline of 2.1%, along with a 2.2% loss in occupancy, resulting in a 4.3% RevPAR decline.

The market has seen a boom in the number of hotel rooms added to the supply, with demand keeping up. “Over the past five years, more than 17,000 new rooms were added to the NYC inventory,” Finkelstein said. “Even with all of these increases in available rooms, occupancy increased by almost two whole percentage points. Clearly, new hotels are quickly absorbing the new supply, as people are continually priced out of the market and new supply is inducing their own demand.”

But the new supply has had a negative effect. “However, because of this new supply, pricing power has somewhat diminished, and hotels are dropping rates,” said Finkelstein. “Hotels saw ADR decrease three of the last four years, though ADR increased in 2018 by 2.7%. ADR is anticipated to decrease in 2019, especially given the level of supply anticipated to open in Q3 and Q4 of this year.”

That new supply is one of several concerns for Vijay Dandapani, president/CEO, Hotel Association of New York City (HANYC). “The market is vastly oversupplied,” he said. “There are more than 800 hotels with a room count of nearly 130,000 in all five boroughs. There are more than 15,000 additional  rooms to come online next year. Added to that, NYC’s hotels have the highest real property tax burden of any member of its commercial class in the city.”

Illegal hotels will also have an effect on the market, as are fears of a new recession, he said. “Demand cannot keep up with growing supply for a couple of reasons,” he said. “The supply curve is distorted due to the absence of illegal hotel inventory in any feasibility study, leading to projects being green-lighted based only on a comp set of hotels. Secondly, there will be a drop off in demand when the next recession comes, compounding the supply problem.”

However, for Michael Zayas, VP, branding & digital, Real Hospitality Group, which manages 45 hotels that are open or in development in NYC, the hotel market is secure. “Occupancy has been keeping pace with additional room supply over the last decade but ADR contribution to RevPAR is now starting to wane,” he said. “The fresh products around the boroughs will continue to give record amounts of visitors variety and diverse experiences.”

CBRE is forecasting a brighter future for the city. Looking toward 2020, New York RevPAR is expected to grow 0.5%, reversing the downward trend of 2019. Prospects for RevPAR growth in the upper-priced segment (2%) are better than in the lower-priced segment (-2.3%). Occupancy levels are expected to range from 86% to 86.5% during the five-year forecast period.

Finkelstein added, “Construction delays have plagued active hotel development projects, so opening dates continued to be pushed back. In 2021, the levels of new supply are estimated to taper, which will allow hoteliers to consecutively increase rates for the first time since 2014.”

Zayas believes the future here is bright despite uncertainty elsewhere. “As uncertainty grows globally, NYC will remain a world-class travel destination,” he said. “We offer an ever-changing cultural scene, renowned attractions and traveler safety. The U.S. economy is sturdy and as household wealth and wages keep increasing, so will domestic travel to NYC. Investments in transportation, The Javits Center expansion and the upcoming Google Campus in Hudson Square ensure our long-term future remains bright.” HB

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