Baird says Manhattan overbuilding concerns overblown

Despite concerns over supply growth, Robert W. Baird & Co. on Monday released a bullish forecast for New York City’s Manhattan borough in 2013, expecting RevPAR growth to track closely with the national average of 5% to 6%, while supply growth remains manageable at 4.6%.

Baird’s outlook for Manhattan (~80% of total NYC rooms) is particularly bullish given the following:

Occupancy levels in Manhattan are above peak 2007 levels and have stabilized in recent months, suggesting pricing power should accelerate in 2013. The biggest hurdle toward aggressive rate growth remains tentative operator psychology, which Baird expects to improve as the timing of supply growth appears less lumpy than in 2009-2010.

Baird estimates 2013 and 2014 supply growth in Manhattan to be 4.6% and 4.0%, respectively, which would pale in comparison to the cumulative ~15% supply growth seen in 2009 and 2010. Recall, 1Q11 was a particularly difficult quarter for the Manhattan market given the concentration of supply growth in 4Q10; tough winter weather also amplified concerns that the 1Q11 weakness was supply-driven. Baird adds to the equation that construction and inspection delays for new hotels in Manhattan are likely to push planned near-term opening dates out further than scheduled.

Even as new supply hits the market in Manhattan, Baird expects incremental demand from the outer boroughs, in particular, to mitigate the likelihood of steep occupancy deterioration, supporting pricing integrity.

Baird also predicts limited-service momentum will likely continue. Manhattan limited-service product has outperformed its full-service counterparts in 25 of 33 quarters since the end of 2009, reflecting an ongoing shift of consumer preferences to stronger perceived value and what it believes is a de-emphasis on the need for full-service amenities in Manhattan.