With so many hotel rooms in the pipeline, a turnaround of slower revenue-per-room growth in New York City is not expected until after 2020. It's a classic supply-and-demand problem, making it a delicate balance to get pricing power back in a city where tourism remains hot.
Operating a hotel in New York City has never been more expensive, thanks to higher labor costs, ballooning property taxes, and hotels’ growing reliance on online travel agencies to boost occupancy.
Cloudy revenue-per-available-room (RevPAR) forecasts, in the face of what promises to be an economic recession in the U.S., also have hotel operators and developers wary of when the city’s hospitality market will rebound from what has been a turbulent year for the industry.
New York City may have bucked recent RevPAR trends in 2018, outpacing the overall U.S. hotel market in the important industry metric (3.5 percent growth compared to 2.9 percent for the U.S.) but this year has been more of the status quo.
New York City room revenues through the first half of 2019 fell 3.8 percent and is projected to finish down around 2.1 percent for the year, the worst output by the hotel sector since 2015, according to recent data provided by industry research firm STR. RevPAR for all U.S. hotels is expected to grow 1.6 percent over the same period.
Analysts chalk up disappointing New York City RevPAR predictions to a classic supply-and-demand problem, which was not prevalent in 2018. In other words, far more hotel rooms are opening across the city than are being filled.
“We’ve seen for a while that supply growth has been healthy, but the lack of demand we’re seeing this year will hurt occupancy and then RevPAR,” said Jan Freitag, senior vice president at STR.
Slowed demand from travelers can be credited to the U.S.’ ongoing trade war with China and anti-immigration rhetoric from the White House, he added. An average daily rate of $237 so far in 2019, compared to nationwide averages in the $80 to $90 range, could also be pricing some travelers out, forcing them to find alternative accommodations.
These trends come as New York City is set to draw a record 67 million visitors this year. Yet The Big Apple is the only top 25 urban market in the U.S. projected to post negative RevPAR numbers next year as well.
“The RevPAR trend is clearly worrisome,” said Fred Grapstein, executive vice president of Vornado Hotels, which runs two legacy hotels in New York City, the Crowne Plaza Times Square and Hotel Pennsylvania in Midtown. “It requires every year more and more creative ways to try to skinny down expenses or raise ancillary fees to offset costs.”
Those expenses include labor, which normally grows by 3 percent on an annual basis, third-party commission fees of up to 20 percent for online travel agencies for booking rooms, and property taxes that continue to go up despite negative RevPAR outputs, he added.
But the largest impact on New York City’s RevPAR results is the number of illegal rooms posted on short-term rental sites, such as Airbnb and HomeAway, which eat away at occupancy rates, operators said.
Gone are the guarantees of compression days — defined as nights when occupancy is above 95 percent, such as during the New York City Marathon — which local hotels rely on to offset slower travel periods of the year.
“Here you can raise the rates to make money lost on very low compression days, but they do not exist anymore because of international familiarity with short-term rentals,” Grapstein said.
The Short-Term Rental Problem
Local lawmakers and hotel industry members believe Airbnb and other short-term rental companies are indirect beneficiaries of Section 230 of the Communications Decency Act. The federal law, passed 23 years ago, protects companies from being responsible for what users post on their platforms — in this case illegal apartments by hosts.
To combat this issue, the New York City Council last summer passed a bill demanding the likes of Airbnb disclose transaction and reservation records to the city. The measure was later thrown out in federal court earlier this year, with both Airbnb and HomeAway arguing the law violated hosts’ fourth amendment rights. The decision later prompted New York City to subpoena the companies in February.
“The majority of homes on these platforms are not able to be listed as hotel rooms on a nightly basis,” said Vijay Dandapani, president and CEO of the New York City Hotel Association, referencing the New York State Multiple Dwelling law passed in 2011, which prohibits residents from renting out apartments for less than 30 days unless the permanent tenant is present during the stay.
“They [short-term rental companies] know about it, but because of platform immunity, you cannot take action against them,” he added. “Nothing against homesharing rentals if it is done kosher. This is not kosher.”
Why build in ‘The Big Apple’
Despite its ongoing problems with RevPAR and short-term rental companies, hotel owners and developers are still chomping at the bit to open in New York City, Dandapani continued.
The market is unlike any other, as it is the only U.S. city that attracts transient customers and group business from both domestic and international travelers at high levels. This can only be matched by international cities, such as Paris, London, Singapore, and Sydney.
The result is occupancy rates of 85 percent, even during a down period, which is far and away better than the U.S. industry average 66 percent so far this year, according to STR data.
One particularly new hotbed for hotel development is the Westside of Manhattan, thanks to the emergence of Hudson Yards as a tourist attraction, and the availability of land around The High Line. That’s where Six Senses Hotels Resorts Spa’s first New York City location is set to open next year.
“I don’t know if it’s a good time or bad time to open in New York City,” said Six Senses CEO Neil Jacobs. “It’s an interesting time, though. There isn’t a lot of upscale product in that part of town, so we can bring something that is undersupplied to that neighborhood.”
“By the same nature, talk of the economy right now gives you pause a little bit,” he added. “It is what it is. I know I wanted to be in New York and I’m enthused and excited about it.”
The advantage Six Senses has over larger chains operating in the city is that its luxury wellness-focused hotels are usually not that big, so there are fewer rooms to fill than the hundreds of corporate room nights that other hotels have to sell.
Six Senses’ new property in New York City will only have 138 rooms, Jacobs said. Six Senses’ core consumer base, which is accustomed to shelling out up to $900 per night at its properties, is additionally likely to be less affected by a potential economic downturn.
But if the costs to open the hotel by The High Line early next year are any indicator, operating expenses for the hotel will be higher than in other luxury markets around the world, he admits.
“We operate in Asia where rates are high and operating costs are still manageable. Everything in New York is very expensive,” said Jacobs. “It’s all a question of rate. If rates are high and costs are high you can still make a little money.”
Sheer customer demand brought alternative accommodations startup Lyric to New York City, according to CEO Joe Fraiman. Founded in 2014, the hospitality company partners with real estate owners to offer luxury apartments to business travelers that have grown tired of staying in standard hotel rooms.
Lyric recently announced a $160 million funding round in April led by Airbnb, and this year will open a new 132-unit location at 70 Pine St., the former headquarters of American International Group. More than 600 total luxury residential units are available in the building. Guests will also have access to food and beverage and fitness facilities.
Not including New York City, Lyric manages 500 luxury apartment units in 14 U.S. markets, according to its website, which are equivalent in experience to a nearby four-star hotel, Fraiman said. Much of its services are offered through tech-driven online capabilities, including reservations and check-in, reducing its reliance on on-property labor.
“This both helps us deliver a personalized and seamless experience for our guests, and helps us offer competitive rates versus what you’d see at a traditional hotel in the area,” he said. “We have noticed a RevPAR slowdown across the city due to new supply, but New York has a history of absorbing this new product very quickly and bouncing back.”
When Will RevPAR Improve?
Hotel owners and operators interviewed are equally as hopeful about the future health of the New York City hospitality industry. Hotels sold nearly 39 million rooms in 2018, and are projected to top that figure this year.
But the reality is that RevPAR will not improve until owners get their pricing power back, according to Freitag. Average daily rates (ADR) have slipped 1.8 percent so far in 2019, due to a 3.1 percent increase in new rooms available and tepid 1 percent increase in consumer demand, according to STR data.
With RevPAR levels where they are, developers will likely stop developing aggressively sooner rather than later, said Freitag. But for now New York City still has more than 14,000 rooms under construction, meaning positive RevPAR is still at least two years away.
“New York City will always be attractive to developers, which is great for the market, but not great for [operators] competitors,” he said. “Room demand growth is there. It’s just that supply growth is stronger.”
Photo credit: A street view of Times Square in New York City, a prominent tourist attraction for travelers. Jörg Schubert / Flickr