Dearth of new hotel supply in New York to benefit owners for several years, says PwC

Scarcity of new hotel openings in Manhattan over the next several years will give owners sufficient cover to drive room rates resulting in higher top-line growth, according to PwC’s latest Manhattan Lodging Index.

“The Manhattan hotel market maintained an occupancy level above 80 percent in each month of the final three quarters of 2023, a first since 2019,” said Warren Marr, managing director, PwC. “While return to office and resultant office vacancies remain a concern as it relates to continued growth in individual business travel, minimal hotel room supply additions over the next several years should benefit existing hotels and increasingly result in price compression in the market.”

According to the report, with jibes closely with one released last week by JLL, RevPAR increased 11.5% year-over-year in the the fourth quarter of 2023. Occupancy and ADR continued to advance, with group and corporate continuing to normalize. Meanwhile, YOY increases in occupancy were highest in November, up 5.7%, and lowest in October, up 2.6%. (November’s New York City Marathon is one of the largest rate compression events of the year.)

With overall occupancy and ADR up to 86.1% and $390.18, respectively, Manhattan RevPAR jumped from $301.44 in Q4 2022 to $336.14 in Q4 2023.

The PwC report tracks four market classes, of which upper-midscale properties exhibited the most significant YOY increase in RevPAR, up 14.7% for the quarter, driven primarily by a 12.8% increase in ADR from $255.83 in 2022 to $288.59 in 2023.

Of the five Manhattan neighborhoods tracked, Lower Manhattan had the largest YOY increase in RevPAR, up 13.2%, driven by a 6.1% increase in ADR and a 6.7% increase in occupancy. Midtown East RevPAR increased the lowest of al neighborhoods, but still grew at a clip of 8.1% over Q4 2023.

During the fourth quarter, growth in occupancy at full-service hotels outpaced that of limited-service hotels, with YOY increases of 4.9% and 1.8% respectively. RevPAR increased 11.4% for full-service properties while limited-service hotels saw an increase of 11.7% over the same period, driven by greater ADR growth for limited-service hotels of 9.7% versus 6.2% for full-service hotels, PwC said.

Independent hotels sustained higher RevPAR growth in the fourth quarter compared to the brands, increasing 14.8% YOY versus 9.4%. The improvement was a result of both higher gains in occupancy and ADR independent hotels.

The vigorous Manhattan hotel market is show signs of abating, but only because the city is gaining toward stabilization. Lower-priced hotels benefited from the customer’s level of rate fatigue being felt in the market, with ADR growth levels for midscale properties triple that of higher-priced hotels in Q4, PwC reported.

Part of the normalization is a result of an uptick in office occupancy in Q4. Following five quarters of “sluggish” leasing activity, fourth quarter office leasing activity in Manhattan increased to 5.3 million square feet, PwC said. However, despite traction in Q4, annual leasing activity decreased by 25.9% YOY to 18.0 million square feet, representing a 17% drop from the five-year annual average to 21.7 million square feet. And, according to Cushman & Wakefield’s Q4 MarketBeat Report, overall Manhattan office vacancy increased 70 basis points to 22.8 percent contributing to an all-time high of 73.4 million square feet of direct vacant space.

A guestroom at the Park Lane, which was sold in August 2023 for $623 million.

What’s Trading?

On the deal front, hotel transaction grew following a slower start to the first half of 2023, noted by two hotel
portfolio sales and seven individual sales. This included Hersha Hospitality Trust selling its portfolio of hotels to KSL Capital Partners as part of its privatization. Four of the hotels are located in Manhattan: Hyatt Union Square, Hilton Garden Inn Tribeca, Hilton Garden Inn Manhattan Midtown East, Holiday Inn Express Chelsea. Hersha owned 25 hotels totaling more than 3,800 rooms and located in coastal markets, including New York, Boston, Washington, D.C., Miami and along the California coast.

The largest transaction recorded in Manhattan was for the 610-room Park Lane across from Central Park. The hotel was sold in August by a group led by Witkoff to the Qatar Investment Authority for a total of $623 million, or $1.02 million per key.