Two events this month proclaimed the reborn power and glory of New York City’s hotel industry.
China’s Sunshine Insurance Group agreed to buy Starwood Capital Group’s Baccarat Hotel for $230m (£149.8m), or about $2m for each of 214 rooms, the highest price ever paid in Manhattan on a per-room basis and all the more remarkable given that the hotel on East 53rd Street has yet to open.
Meanwhile, the city’s burgeoning inventory was bolstered by the launch of the 330-room Knickerbocker — a landmark, Beaux-Arts treasure at Broadway and 42nd Street built by John Jacob Astor IV. The corner was once among Midtown’s most dangerous and the property had changed hands time and again since the 1990s until FelCor Lodging Trust spent a total of $240m to buy and transform it.
All this has happened against the backdrop of a boom in the sector: 84 hotels have opened in the past two years, trading values have soared to $400,000-$500,000 per key for midline properties and $850,000-$1m per key for 4* places and occupancy rates to around 90%.
The boom is riding the high-energy momentum that peaked under former Mayor Michael Bloomberg, when a strong economy and a floodtide of global cash swept through town. Bloomberg further accelerated hotel growth through rezoning, which allowed them to be built in ‘manufacturing’ districts. A record 55 million visitors came to town in 2014. At the same time, revenue from business travel, which constitutes up to 50% of hotel revenue, has risen as companies loosened purse strings following years of penny-pinching.
Will the good times last?
Investors seem heedless of the industry’s notoriously cyclical nature. China’s Anbang Insurance Group paid $1.95bn in 2014 for the Waldorf Astoria, the highest price ever paid by a Chinese company for a single Manhattan building. (Hilton will continue to manage the Waldorf for 100 years). Foreign demand is fueled by perceptions of New York City as a ‘safe haven’ for capital. CBRE hotel broker Bradley Burwell noted that overseas concerns’ “investment and return criteria are much lower” than those for more cautious North American REITS and institutional investors.
Current, ‘progressive’ Mayor Bill de Blasio is more intent on lifting the fortunes of the poor than catering to high-spending world travellers. However, the threat to hotels’ continued vitality is not from City Hall, but from unpredictable global currents.
No commercial sector is as fragile as hotels. World Trade Center developer Larry Silverstein ruefully said to me in January 2001 that the first Gulf War had broken out the day after he opened the new Embassy Suites in Times Square in 1991. The short-term collapse of global travel was enough to imperil the 48-storey property he’d built and he sold his interest to lenders (it is today a DoubleTree by Hilton).
The terrorist attack on 9/11 virtually emptied New York’s hotels. Two weeks later, I saw scarcely a guest in the vast lobby of the 2,000-room New York Hilton. But, barring another such catastrophe, the darkest cloud today is the dollar’s recent dramatic rise against European and Asian currencies. Foreign visitors’ diminished buying power, combined with swelling inventory, prompted certain Times Square-area owners to quietly reduce rates by 10%-20% in the weeks before the new year. “You have people from abroad able to spend less at the same time as we keep adding rooms,” said an operator who didn’t want to be named. “So far, no big deal. But will the combination reach a tipping point that begins to hurt?”
A key for every kind of room
Today’s options might bewilder anyone making a first visit to town in two decades. For generations, the city’s selection of respectable venues was known and fixed: mostly large east and central Midtown hotels, a handful on the Upper East Side and one or two far Downtown. Even the ‘boutique’ concept introduced by Ian Schrager in the late 1980s was largely restricted to Midtown.
After several large old properties like the Drake were razed and The Plaza was scaled down from 800 rooms to 200, Manhattan’s room stock fell well below the longtime average of 70,000 by the early 2000s. But, some 30,000 new rooms have lifted the total to 102,000 today and more in the pipeline will bring the number to an all-time high of 110,000 in 2016.
Visitors can stay on far west 10th Avenue; in once-gloomy Garment District blocks; at a half-dozen first-class properties near Wall Street and the World Trade Center; in central Harlem; all over the Lower East Side; along Brooklyn’s Williamsburg waterfront and even in tiny Canal Park Inn, a four-room bed-and-breakfast on far-west Canal Street.
While most budget properties built by such prolific developers as Sam Chang are ground-up projects, the 4* inns are wedded to mixed-uses. The new Baccarat, Park Hyatt and Four Seasons Downtown anchor the lower levels of condo apartment towers. Astronomically higher land, air rights and construction costs make developing freestanding luxury hotels untenable. Most analysts say the free-standing Four Seasons on East 57th Street, built in the 1980s, might be the last of its kind.
Room rates soar to $800-a-night in super-luxe properties such as the Four Seasons, Peninsula and Mandarin Oriental. But rooms can also be had in the low hundreds of dollars a night at eight locations of Hilton Garden Inn, one of numerous ‘budget’ flags that have sprung up.
The ‘Knick’ is not the only designated landmark to be re-purposed for hotel use (it had been a class-B office and showroom building for decades). The former Met Life headquarters on Madison Square Park, The Clocktower, will open this spring as Marriott’s New York Edition, designed in collaboration with Ian Schrager. Later this year, the Beekman Hotel will open downtown near City Hall, in a long-empty, 19th-century former office building. With restaurants by Tom Colicchio and Keith McNally, it is likely to be one of the city’s hottest new places to stay.
Steve Cuozzo is a real estate columnist and contributor at the New York Post