NEW YORK CITY-At the recent?NYU’s International Hospitality Industry Investment Conference, the point was continually made that it?s the?opportune time to build hotels, due to readily available construction financing and the large number of companies focused on increasing their presence in New York City.
The reason for this optimism is that?hotel valuesare now higher than their replacement cost in part because of the paucity of planned developments during the Great Recession. A tremendous growth in both business and tourist travel since then, and the replacement of much of the wealth that was lost between 2008 and 2010, has resulted in more tourists coming to New York. In 2012 the lines representing the cost to build versus the value of hotel rooms crossed and, for the first time since briefly in 2007 and prior to that between 1996 and 2002, the cost to buy luxury hotel rooms is higher than the cost to build them. This is also true of the Upper Upscale segment, and the Upscale segment. Moreover, even the value of rooms in the economy segment is likely to exceed the cost to build them by 2015.
What is driving this increase in value is the change in supply over the last few years. This is especially true in New York City, where all the existing construction and planned development through 2016 will only result in a 4.3% increase in the supply of rooms. Meanwhile, many older hotels are in the process of being transformed into residential apartments and many of the new ones are part of mixed-use condominiums, so the net increase in rooms will be negligible considering the size of the market. Additionally, room rates are now approaching the level they were prior to the recession, which demonstrates the effect of the increasing demand on the supply.
At the same time of the conference, the New York Hilton Midtown revealed they were discontinuing room service, obviously testing a trend among some newer, less costly hotels, to increase profitability by eliminating costly services. In a city like New York, with thousands of restaurants catering to all demands and wallets, room service may no longer be necessary. This change also demonstrates the flexibility of the hospitality industry in the city which, as a result of expanding demand, can be creative in the way in which it operates. The changes in the industry are also shown by the increase in luxury and super luxury rooms at one end of the market to micro rooms at the other end.
Another factor at play in New York?s booming hospitality market, in addition to the continuing decrease in crime and improvements in safety and cleanliness of the streets, is the new crackdown by City Hall on apartments being rented on a nightly basis like hotel rooms. A new task force has been formed to deal with tenants and co-op and condo owners, who turn their apartments into Bed N’ Breakfasts notwithstanding the rules that the landlords and boards have been attempting to impose on their own. This will fuel further demand for rooms, although it is not likely to be at the high end of the market.