Bloomberg News

Building Manhattan Hotels Beats Buying as Development to Surge

November 02, 2011

Oct. 24 (Bloomberg) -- Building a hotel in New York City is becoming more affordable than buying as demand from publicly traded investors helps drive a surge in property prices.

Increased competition for purchases has led developers to plan the opening of about 50 new hotels this year through 2013 in New York, more than triple the number in Washington, the next-busiest U.S. city for construction, according to hotel- consulting firm Lodging Econometrics. Sixty-eight more are set for completion in 2014 and after.

Hotel developers, many of whom stopped building in Manhattan and other New York boroughs when financing dried up during the recession, are returning following a gain in commercial-property prices, which are at their highest since a record reached in 2006.

“Right now, it can be cheaper to build than to buy in New York,” said Bruce Ford, senior vice president of sales at Portsmouth, New Hampshire-based Lodging Econometrics. “Most developers would argue that it’s better to open a hotel in 2013 than in 2012, but in New York City, a market that leads the cycle, next year should be good.”

Manhattan lodging properties sold for an average of $505,157 a room this year through Sept. 30, up from $344,799 for all of last year and $413,644 in 2009, according to research firm Real Capital Analytics Inc. At the 2006 peak, the average was $632,894. Meanwhile, companies including DiamondRock Hospitality Co. and Hidrock Realty Inc. are building hotels for $300,000 to $450,000 per room.

Schrager Buys Land

Hotel construction in New York City includes the gutting and redevelopment of office buildings as well as the demolition of existing structures to make way for ground-up buildings.

Ian Schrager, a pioneer of the boutique hotel concept, said earlier this month that his company agreed to buy a development site in New York City and was close to completing a second Manhattan deal as part of a plan to develop trendy, less- expensive properties in “gateway” cities. He declined to give details of the plots or say how much he’s paying for them.

“As long as a new build is around $400,000 to $500,000 a key, you can build all day long in New York because it’s in line or below what you would pay for an existing building,” Schrager said in an Oct. 7 interview.

Real estate investment trusts have been contributing to the increase in prices for existing hotels, making $1.14 billion in lodging purchases in Manhattan this year through Sept. 30, according to Real Capital. That accounted for 38 percent of the total traded in the city.

Radisson Lexington Hotel

Fourteen New York hotels sold from May through August, all of which went for more than $400,000 a room. They include the Radisson Lexington Hotel, the Four Points by Sheraton Midtown- Times Square, Affinia Gardens and the Yotel, which features small “sleeping cabins,” PricewaterhouseCoopers LLP said.

Among the costliest transactions was Morgans Hotel Group’s sale of the Royalton New York to Irving, Texas-based Felcor Lodging Trust Inc. for $84.6 million, or $500,447 a room. Affinia Manhattan sold for $560,685 a room, while Affinia Gardens, which has residential-style suites, traded for $910,866 a room, according to the PricewaterhouseCoopers study.

The price surge has helped spur development. In New York’s five boroughs, which have the most hotel rooms in the pipeline after Shanghai and Dubai, there were 25 hotel openings in 2008, 27 in 2009 and 34 in 2010. This year, 22 are coming on line, followed by an expected 23 in 2012, nine in 2013 and 68 in 2014 and beyond, according to Lodging Econometrics.

‘Under-Supplied Market’

“Manhattan is an under-supplied market because it’s a seven-day market,” said David Loeb, a hotel analyst at Milwaukee-based Robert W. Baird & Co. In one week in early October, New York hotels were 91.7 percent occupied.

“Very few other markets come close to that,” Loeb said.

Earlier this year, Bethesda, Maryland-based DiamondRock agreed to buy a hotel being developed in Manhattan’s Times Square area by a joint venture of Walton Street Capital and Highgate Holdings. The price will be between $112.5 million and $135 million, or about $450,000 a room, DiamondRock said on Jan. 18. The cost of the property, scheduled to open in 2013, will depend on its ultimate number of guest rooms.

Starwood Capital Group LLC, the buyout firm founded by Barry Sternlicht, agreed in March to take over a development contract from Orient-Express Hotels Ltd. for the New York Public Library’s Donnell branch on West 53rd Street, in a partnership with Tribeca Associates LLC. The buyers plan to spend $400 million on the site, which includes condominiums, hotel rooms and a library, according to a March 16 article in Crain’s New York Business that cited sources it didn’t name.

Tom Johnson, a spokesman for Greenwich, Connecticut-based Starwood, declined to comment on the cost of the project.

Park Hyatt Hotel

Gary Barnett’s Extell Development Co. said in November 2010 that it’s building a 210-room Park Hyatt hotel, which will also feature 135 condominiums, on West 57th Street for an undisclosed amount.

Of the hotels scheduled to open in 2012 and 2013, at least half are in the economy, mid-scale and upscale segments, including a Holiday Inn on West 31st Street, a Hampton Inn on Pearl Street in lower Manhattan and a Days Inn around Times Square.

“There’s diversification of the types of hotels going into major cities, such as properties that are more commonly referred to as select-service type of hotels,” said Ford of Lodging Econometrics. “That’s been leading to a lot more hotels in development.”

Courtyard, Residence Inn

Marriott International Inc., the largest publicly traded U.S. hotel company, signed an agreement with Granite Broadway Development for a 68-story project at Broadway and 54th Street in Manhattan, the Bethesda, Maryland-based company said in August. The property will include two hotels, a Courtyard and a Residence Inn. They are scheduled to open in late 2013. Marriott didn’t disclose the cost of the project.

Hidrock, based in New York, is redeveloping a former office building at 960 Sixth Ave. in Manhattan’s Fashion District into a Courtyard for about $300,000 a room. The total cost of $72 million includes a bank branch on the bottom floor, according to Hidrock President Abraham Hidary.

The company also is building a SpringHill Suites on West 37th Street in a venture with Robert Finvarb Cos. The cost is $53.1 million, or $320,000 a room. The two properties are Hidrock’s only hotel developments, Hidary said.

New York hotels had an occupancy rate of 80 percent this year through August, the second-highest among the top 25 markets, after Oahu, Hawaii, according to Hendersonville, Tennessee-based Smith Travel Research Inc.

Weighing on Rates

The new supply coming on line in New York, along with slowing economic growth in the U.S., may begin to weigh on occupancies and room rates, said Patrick Scholes, an analyst at FBR Capital Markets Corp. The U.S. unemployment rate has been 9 percent or higher in all but two months of the past two years.

“The beginning of a decline in bookings will start to show cancellations and declines next year,” Joel Ross, principal at New York-based Citadel Realty Advisors, wrote in a note to investors on Sept. 27. Citadel is an investment banking and real estate financing firm.

“Companies already are reducing their event schedules for 2012, and some are telling their branches that any internal meeting must now be held in company facilities, not at a hotel,” Ross wrote.

Global financial companies have announced plans to cut more than 120,000 jobs this year, according to data compiled by Bloomberg Industries. Charlotte, North Carolina-based Bank of America Corp., the second-biggest U.S. lender by assets, in September said it would eliminate 30,000 positions in the next few years, part of an overhaul intended to cut annual costs by $5 billion by the end of 2013.

Decline in Revenue

The new supply in the city will lead to a 1 percent to 2 percent decline in revenue per available room, an industry measure of occupancy and rate, in 2012, compared with an expected 5.5 percent increase this year, according to Jan Freitag, vice president at Smith Travel.

While most of the hotels planned for Manhattan are likely to succeed, “on the whole such supply has a huge impact on revpar growth for 2012,” Freitag said in a telephone interview.

Even with growing economic pressures, developers including Hidrock believe lodging projects in the city will be profitable.

“Construction costs are so high in New York, it’s very, very difficult to build an office and have it make financial sense,” Hidary said in a telephone interview. “The only two types that work are residential and hotel, because your income potential is so great.”

--Editors: Daniel Taub, Christine Maurus

To contact the reporter on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net


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