Reminder: Hotels are long-term investments

Recently, much has been articulated about the wavering New York City hotel market, as unease and uncertainty exists in connection with year-over-year comparisons during the first quarter. The concerns have been overblown by several stock analysts who tend to focus on short-term results and journalists seeking sensational stories.

An exceptionally harsh winter and the fact that Q1 2014 comparisons include Super Bowl XLVIII have in fact contributed to relatively soft recent RevPAR results. The U.S. dollar is placing strong negative pressure on inbound international tourism, the global economy is weak and of greatest concern, 13,000 rooms are currently under development on top of the 30,000 new rooms that have come online during the recent past. 

Demand for NYC hotel rooms remains robust and, barring a catastrophe, is expected to endure. Fundamentally, on a long-term basis, the NYC hotel market continues to be underserved with hotel rooms, as evidenced by continued annual occupancy in excess of 85%. 

As Manhattan land prices, which are already at record highs, continue to rise and become a larger percentage of the overall construction cost of a project, it is evident hotel development is not the highest and best use of most vacant real estate. While highest and best use of a property is predicated on its specific location, this general trend should ease concerns relative to the potential oversupply of hotel rooms over the long term. Furthermore, if a New York City hotel can be acquired free and clear of any brand and/or management encumbrance and/or the building’s floor plates are conducive for apartments and the zoning permits it, the property’s highest and best use is most likely residential conversion — either condominium or multi-family. For example, Anbang Insurance Group, the new owner of the Waldorf Astoria, has announced its intent to convert part of the iconic hotel into luxury condominiums. It is imperative to factor in deletions from supply and consider the market’s net new supply.

Hotels are long-term investments, and acquisitions of NYC assets that are market-priced based on traditional holding periods of five to 10 years will invariably prove to be fruitful. Immediate concerns about the NYC market are valid only for those who wrongly consider hotels to be short-term investments with an automatic assumption of rapid appreciation in the near term. With this said, there is no doubt many investors who acquired assets between 2009 and 2011 have in fact benefited from the recent dramatic increases of prices paid for NYC hotels.