Market Snapshot: Legislation drives change for NYC hotels

New York City’s return to hospitality dominance has been a race rather than a slow-and-steady climb—and new legislation could help drive both demand and profitability.

Legislation and Hospitality

Local Law 18, also known as the Short-Term Rental Registration Law, was adopted in 2022 and went into effect in September 2023. According to the Mayor’s Office of Special Enforcement, the law requires short-term rental hosts to register with the OSE and prohibits booking service platforms like Airbnb, VRBO or online travel agencies from processing transactions for unregistered short-term rentals. The OSE also will maintain a list of buildings where short-term rentals are prohibited. 

According to JLL’s State of the Lodging Industry November 2023 report, the law is likely to cut the city’s existing short-term rental supply by 70 percent. This, in turn, could drive as many as 2.2 million additional room nights for 2024, or an additional 4.3 percentage points in occupancy and $380.4 million in revenue. 

Kevin Davis, Americas CEO at JLL Hotels & Hospitality, estimated that the law took the city’s Airbnb stock from 35,000 to fewer than 500 accommodations. “Many people that would have otherwise stayed in [an] Airbnb are now staying in hotels,” he said. “This is not just a passing fad. This is a trend which we expect will continue for the next several years.”

Aggressive Numbers

According to JLL’s State of the Lodging Industry November 2023 report, total visitation to the city is expected to reach 70 million by the end of 2024, exceeding the 2019 peak by 4.5 percent. Year-to-date revenue per available room exceeded 2019 levels by 12.3 percent in October, particularly in the luxury segment, and recovered 112 percent compared to October 2019. 

Hoteliers, Davis said, have been “aggressive” at raising rates in the city, but that aggression has meant that occupancy is still below 2019 numbers. “I think we will start to catch up,” he added.

Owners have been similarly aggressive, driving $2.8 billion in hotel transactions in the city for the first 10 months of 2023. Davis noted a return of foreign capital investing in the city’s hotels, a trend that he expects to continue. “We expect that there will be more transactions, more hotels that sell in 2024, in part propelled by strong economic performance, and what we hope will be an improved capital markets environment that will facilitate more trades taking place.” 

Amended Development 

Another piece of legislation that restricts new construction also may promote hotel transactions. The 2021 Citywide Hotels Text Amendment requires developers secure a special permit to build a hotel anywhere in the five boroughs—a hurdle that Davis thinks could limit new hotel construction. 

The pipeline, as of Q3, is still strong, especially when compared to other domestic markets. According to the third quarter United States Construction Pipeline Trend Report from Lodging Econometrics, as of Sept. 30, New York City had the greatest number of projects under construction in the country at 46 hotel projects with 8,386 rooms. By late November, that number had shrunk to 42 hotels with 7,364 rooms, said Bruce Ford, senior vice president, director, global business development at Lodging Econometrics. 

“It has gotten incredibly difficult to build hotels in New York City, and also much more expensive to build hotels in New York City,” Davis said, calling the city’s near-future supply growth “fairly benign.” Between 2012 and 2022, the city’s hotel stock tended to grow about 3.8 percent per year. “We're projecting, over the next several years between 2023 and 2025 [for growth] to only be 1.7 percent.”

The cost of construction relative to replacement costs “is very high,” he added, and combined with the new legal restrictions, potential owners may find it less expensive to buy an existing asset than to build a new one. “You're likely looking at a 30- to 36-month lead time in terms of getting something through pre-development, out of the ground and open,” he said.

The restrictions are also driving major renovations of existing assets, Ford noted, with the Millennium Hilton New York One UN Plaza and the Benjamin on Manhattan’s East Side both planning upgrades for 2024. Investment in Manhattan, he added, is focused on “remake and refresh” projects rather than new development. 

Outer Boroughs and Airport Appeal

Notably, 27 of the 42 hotels that were under construction in late November were not in Manhattan. “They're either in Brooklyn or the Bronx or Jamaica, [Queens],” Ford said, noting that Long Island City and Staten Island are seeing increased development. 

Davis noted that a number of hotels, including many in the outer boroughs, are hosting migrants as they seek a path to citizenship. “Many of those hotels are functioning at 100 percent occupancy,” he said, calculating that approximately 17,000 hotel rooms are being occupied by migrants. “Depending on which count you use for total hotel supply in New York City, that’s roughly 13 percent of the whole total hotel supply.” Many of those hotels, he noted, have officially been offline while they help the migrants. “In order to bring those hotels back online, the owners are going to have to invest significant capital to renovate and upgrade the hotels.”

Major overhauls around both LaGuardia Airport and John F. Kennedy International Airport also are driving hotel development close to those hubs, Ford said, as new sites become available. “What a hotel developer that’s at an airport location is looking for is three minutes to the terminal,” he said. The Queens neighborhood of Jamaica, close to JFK Airport, has seen substantial growth in recent years with a number of Marriott brands. The so-called “JFK/Jamaica Tract” recently got a new 360-room Marriott, and as of press time, a 224-room Courtyard and a Fairfield Inn were scheduled to open by the end of the year while an Aloft and an Element are slated to open in early 2025.

Beyond Marriott, Ford said Wyndham and Hilton also were slated to open hotels close to JFK and that LaGuardia is slated to get a Westin and a Hilton Garden Inn. Conversions are also underway, with a former 385-unit Radisson set to reopen as a DoubleTree by Hilton in mid-2024. 

In total, Lodging Econometrics counted nine hotels with a total 1,467 guestrooms and two hotels with 458 rooms under construction near JFK and LaGuardia, respectively, at the end of Q3. “For many years, getting a select-service brand into a borough … was not something people did,” Ford said. “Now they're doing it. Select-service hotels [are] sweeping through the boroughs.”

Davis agreed. “Nature abhors a vacuum,” he said. “If you have submarkets in the city where there's strong anticipated demand and no product, it makes sense that developers and brands will try to locate hotels in those submarkets.”