Change is constant for the hotel sector, especially in New York City, where acquiescing to and combating the myriad local, national and international events is an ongoing occurrence for hotel owners, operators, developers and investors. Right now, the market and the industry players who create it are witnessing a mix of influences that are expected to help shape the outlook for the New York hotel space overall as it moves through 2024. Key among these are hotels coming offline to traditional guests for use instead as homeless/migrant housing, a recovery in demand, a crack-down on short-term rentals, shifts in municipal regulations, particularly targeting new hotel development and expansion, and an overarching tightening on new-construction loans due to interest rate hikes.
How much of this affects the appeal of New York’s reputation as a high-barrier-to-entry market, and whether it still ranks high as a “have-be-there” market for industry movers and shakers, may be up for debate depending on interested stakeholders’ goals.
Financial performance is often bifurcated into the top line and the bottom line. And while revenue continues to be buoyant, contends Sean Hennessey, founder and CEO of Lodging Advisors and an associate professor at the Jonathan M. Tisch Center of Hospitality at New York University, profit margins are being squeezed. “New York City hotel investments remain off limits for some investors, but not for others. While top-line fundamentals are improving, profit growth has lagged due to local minimum wage initiatives, elevated general cost inflation and one of the highest property tax burdens in the country,” he said. It’s reasons like these that give investors pause, he said. “Given this, expect to see publicly traded REITs and C-corps stay away from New York in 2024. Opportunistic investors are actively seeking distressed offerings, but there will be few of those in 2024 as operating fundamentals strengthen.”
Hennessey, a 40-year industry veteran, does expect two deep-pocketed groups to be active this year, depending on what opportunities the hotel market presents. “First, would be the world’s wealthiest individuals and family offices,” said Hennessey, noting any iconic or trophy properties put on the block would be attention-grabbers for them. “Given that the high-end of the investment market has largely lain fallow since the onset of COVID, expect to see some trophy assets come to market in 2024, since they can now be marketed with positive operational momentum.”
For other-than-trophy hotels, he expects to see interest from “well-capitalized owner-operators,” groups like Highgate and MCR, which have the confidence to invest in value-add opportunities, due to their ability to turn around low-performing hotels.
DATA POINTS
2023 key performance metrics were much improved over 2022. As of the week ending December 9, according to CoStar data, occupancy was at 84.1% compared to 80.6% at the same time in 2022; average daily rate (ADR) came in at $372.46, up some $30 from 2022’s $342.06; and revenue per available room (RevPAR) hit $313.36, a strong increase over last year’s RevPAR of $275.86. Two out of the three 2023 metrics outperformed the same KPIs charted in the same time period of 2019, where CoStar data showed ADR at $297.44 and RevPAR at $260.24. Occupancy for the period was 87.5%.
“New York City demand has recovered well,” said Jan D. Freitag, national director, hospitality analytics for CoStar Group. “The three-legged stool of demand generators—leisure, corporate transient and group— is holding up well and supports higher occupancies and healthy ADR growth.”
Hennessey characterized the market similarly. “Demand has been robust, particularly from leisure travelers. Corporate travel is improving at a modest pace, reflecting the challenges of return-to-work initiatives,” he said, adding that several new hotels will bump up supply, but noted the pace of openings “has trailed off.” That said, he felt new hotels should not have a material effect on occupancy or room rates. “In fact, the planned reopening of the Four Seasons New York—slated for fall— might benefit room rates in the luxury segment,” he said.
Rooms—and their addition and subtraction from the market—have been the subject of industry chatter for some time now, starting with the onset of the COVID-19 pandemic in 2020, when travel to the city basically halted and hotel rooms became havens for emergency and essential workers and the homeless, to more recent times, where, as a so-called sanctuary city, some 16,000 hotel rooms across the five boroughs, according to CoStar data, have come offline to travelers and are being used by the city via leases to house the homeless, as well as U.S. southern border migrants/asylum seekers being transported in waves to New York from states such as Florida and Texas, plus migrants who are making their way to New York from other countries.
It’s estimated that more than 100,000 asylum-seekers have arrived in the city since spring 2022, with more individuals and families continuing to arrive.
In a recent report, CoStar’s Freitag noted as of October 2023, 140 city hotels had been taken out of inventory for traditional guests, either permanently or temporarily, and were being leased by city/ county authorities for the homeless, migrants and asylum seekers. Of these properties, he noted, 66 previously carried brand flags, representing some 6,500 rooms and the majority of major hotel chains.
A year ago, this January, the 300-member Hotel Association of New York City (HANYC) inked an agreement with the city’s Department of Homeless Services to house at the minimum some 5,000 migrants at a reported cost of $275 million.
According to HANYC President and CEO Vijay Dandapani, approximately 20 members currently are participating in the city’s migrant housing program, which remains fluid.
“The Department of Homeless Services program has, indeed, become larger than what was initially anticipated due to the continued inflow of migrants from the southern border to New York City,” said Dandapani. He noted that while HANYC is administering to most, though not all, of the hotels participating in the program, not all participating hotels are members of HANYC. “The eventual budget for this program is still to be determined given the open-ended nature of migration,” he said.
On December 11, at an oversight hearing on Mayor Eric Adams’ November Financial Plan, chaired by Finance Committee Chairman Justin Brannan, New York City Council Speaker Adrienne Adams stated the Mayor’s Office of Management and Budget “has projected that the cost of care and shelter for migrants will be $12 billion over three years, while other financial oversight bodies have estimated lower costs. The Council has urged that the Administration pursue different ways to provide asylum seeker-related services that are more effective and cost-efficient than the city over-relying on contracts with expensive, for-profit companies.”
Dandapani noted with his organization there are no long-term leases and “all contracts are terminable with 90 days’ notice by either party.”
He expects most properties will return to the transient hotel business once the program is over. “HANYC has no concerns as this is entirely a voluntary program that only underscores the fact that New York City’s hotel business has not returned to pre-2019 levels. Most hotels that are in the program jumped on it at its inception, which, again, underscores the previous point,” he said, adding some of these hotels had participated in the shelter-in-hotel program during COVID.
The HANYC CEO acknowledged he’s seen increased interest by potential hotel owners/investors looking to scoop up hotels so they can get into the migrant-housing game. “Yes, some ownership groups are actively working on buying hotels to convert them to the migrant business,” said Dandapani.
“For 2024, I expect migrant demand to continue to be an appealing option for the hotels that have so far pursued that route,” added Hennessey.
However, over the long term and with the assumption New York’s migrant-housing crisis eases, Hennessey foresees temporarily converted hotels reverting to their highest and best use as lodging operations. “Most hotels are not readily convertible to desirable residential apartments due to the city’s zoning and building codes. Some older properties that were already nearing the end of their economic life will likely become development sites or tear-downs, while newer hotels that are not functionally obsolete will return to hotel stock,” said Hennessey. “In many cases, the return to transient use from emergency housing will require major renovations, given the higher than-average people per room and the 100% occupancy, which limits management’s ability to perform routine maintenance.”
The number of rooms repurposed is double the 8,000 plus hotel rooms currently under construction, and Freitag reported those “will come online over the next quarters, on the heels of the 4,000 rooms that opened over the past 12 months.”
MOVING FORWARD
Navigating the network of New York City development takes know-how, gumption, time and, above all else, a lot of money. Hotel owners and developers were recently issued good fortune from the city after its clampdown on short-term rentals, namely, Airbnb. Local Law 18 is a quasi-death knell for short-term rentals in the city and a boon for hotels. It, among other things, prohibits rentals for less than 30 days and mandates that hosts be physically present while their properties are being rented.
It’s not all rosy for hoteliers; of course not, it’s New York. Owners, developers and investors looking to build or expand a property beyond 20% have to deal with the City Planning Commission and secure an approved permit (also known as the Citywide Hotel Special Permit) to be in mixed use, commercial and other districts via a lengthy, involved process. According to the CPC, the review process allows it to ensure new hotels “do not create significant conflicts with surrounding development.”
In considering of this, CoStar’s Freitag said, “Overall, the reduction in inventory, coupled with the reduction in [short-term-rental] supply and the new normal of ‘higher for-longer’ interest rates, will impact the supply pipeline—all taken together, it means that the supply picture in New York will be quite favorable once the in-construction properties are open. The higher expenses will make some marginal projects fall by the wayside, but this also spells opportunity for well capitalized developers with a long-term horizon.”
From his perspective, Dandapani sees the Special Permit as “singularly unappealing” for developers who may have to add months or years to their project to get all the clearances. “That makes it hard to have a fair estimation of project costs, as well as make reasonable revenue projections upon project completion,” he said, adding that while there is no shortage of inventory as of now, “continued growth in tourism even beyond 2019 numbers will require a more robust pipeline for the city to remain competitive in both the For his part, Hennessey is anticipating mid-double-digit demand growth, with supply growth of around 10%, putting upward pressure on occupancy. “So, we should see occupancy in the 84% to 85% range where it has been for two decades now,” he said. transient and meetings market.”
Still, this year he expects to see RevPAR growth due to both the inventory constraint from migrant housing in hotels and an increased number of visitors.
CoStar data forecasts a slowing in 2024 of occupancy, ADR and RevPAR growth compared to 2023. Year-over year percentage changes for occupancy in 2023 show a gain of 8.6%, dropping to only a 3.2% gain this year. ADR enjoyed a 6.3% gain last year, with a 2.5% gain expected for 2024. And RevPAR growth is forecast to slow considerably, with almost a 10% drop from 15.5% last year to 5.8% this year.
For his part, Hennessey is anticipating mid-double-digit demand growth, with supply growth of around 10%, putting upward pressure on occupancy. “So, we should see occupancy in the 84% to 85% range where it has been for two decades now,” he said.
“New York will always have challenges and doubters. But even the predictions of two years ago that it would not recover from the ‘work remotely’ mindset are being proven wrong as demand for hotels and apartments has strongly improved,” Hennessey continued. “There are many potential positives in the offing: casino gaming, a new Gateway tunnel that will greatly improve accessibility and improvements to New York’s port facilities that will improve the region’s commercial competitiveness.”
A longtime New Yorker, Hennessey has loads of city memories to refer to. “As someone old enough to remember the 1970s tabloid headline ‘Ford to City: Drop Dead,’ I remain convinced that New York will be able to retain its position as one of the world’s cultural and financial capitals for decades to come,” he said. “This strength will also foster a vibrant and healthy hotel sector.”
Story contributed by Stefani C. O’Connor.