Defying pandemic, New York City maintains development pipeline

New York City
For full-year 2020, New York City occupancy was 46.6 percent—40 points below what it was for 2019, according to STR. Photo credit: OlegAlbinsky/iStock/Getty Images Plus/Getty Images

After a solid first quarter of the year, the COVID-19 pandemic caused an “unmatched drop in visitation” to New York City during the last nine months of 2020, according to a report from Tourism Economics and NYC & Company, the city’s tourism board. As of mid-November, the board expected visitor numbers to be 66 percent below 2019 levels.

For full-year 2020, New York City occupancy was 46.6 percent—40 points below what it was for 2019, said Jan Freitag, SVP of lodging insights at STR. The metric was calculated by looking at available rooms and not including hotels that have temporarily closed due to lack of a business. With those properties factored in, Freitag said, the city’s occupancy for the year was 34.7 percent.

In December alone, the occupancy calculated with the standard methodology was 35.8 percent and 25.6 percent using the adjusted methodology. “That is a 28 percent difference, and that implies that 28 percent of the rooms in New York City are temporarily offline,” he said. “That's a pretty stark drastic number—over one in four rooms were offline in the month of December.”

The room rate, meanwhile, was more than $100 below what it was in 2019, down to $152 from $254 in 2019. This translated into a decline in revenue per available room of 67.7 percent year over year.

Slowed Transactions

The pandemic affected hotel transaction volume and activity greatly during 2020, said Jenna Finkelstein, VP of northeast hotels advisory practice at real estate firm CBRE, noting that transaction volume in the city declined more than 80 percent. “Many trades were stalled and failed to close as a result of lender pullback or buyers being rattled by the unknowns of the pandemic and [finding] ways to exit contracts,” she said.

New York City hotels have a higher operating cost compared to other markets, largely due to the cost of labor in a union market, Finkelstein explained. “Of the majority of assets that did sell In New York City, hotel owners were in need of liquidity and were under pressure, causing some sellers to sell their hotel at up to a 50 percent discount.” But as time went on, so did the prospect of recovery. Sellers became less likely to trade at a steep discount as the year went on, she said.

Steady Development

In 2020, nine new hotels with 1,075 guestrooms opened in the New York market, said Bruce Ford, SVP at Lodging Econometrics. As of the company’s latest calculations, the market has 108 hotels with 19,439 guestrooms under construction, 14 of which (with 2,617 rooms) started construction in Q4 2020. A further 20 hotels with 2,624 rooms are scheduled to begin construction in 2021, and 22 projects with 3,577 rooms have been announced but are more than a year out from starting construction.

The total new construction pipeline in New York is 150 hotels with 25,640 rooms, he said. The market now leads the U.S. in the number of pipeline hotels for the first time in six quarters, according to LE’s "U.S. Construction Pipeline Trend Report." Seventeen hotels with 2,700 rooms were announced in the fourth quarter of 2020.

About 25 of those projects in total are around the John F. Kennedy and LaGuardia airports, Ford added, noting that the properties were already under construction when the pandemic hit. “If you get a slot to have a hotel within the tram line at JFK or LaGuardia or within two or three blocks of the airports, you're not going to stop,” he said. “Your expectation is [that] travel will return.” Building a hotel in a downturn offers some benefits to developers, he added, noting cost efficiencies and the likelihood of opening early in the next upturn. “This is ... about seizing an opportunity that is unique and rare.”

In comparison, New York’s total pipeline in January 2020 had 158 properties underway with 25,825 guestrooms, meaning development has not declined significantly year over year. “People aren't cancelling projects yet,” Ford said. “They may be delaying the start of the project. They may be delaying the opening of the hotel. But they're not stopping projects that are in the pipeline and not canceling projects that are in the pipeline because the expectation still is demand will return.” 

STR, meanwhile, calculated 18,000 rooms under construction across the market, and noted that 10,000 are in the limited-service category, covering the upscale, upper-midscale, midscale and economy segments. “Those projects dominate the pipeline nationally and also in New York City,” Freitag said. “And we don't really see any reason why that would change.”

Notable upcoming openings slated for early 2021 include the 238-room, 29-story Margaritaville Hotel in Times Square, the 79-room Aman Hotel (taking up five floors of the historic Crown building) and the 196-room Le Meridien from Sam Chang. In the summer, HFZ Capital Group is scheduled to open the 137-room Six Senses New York in Chelsea, the brand’s U.S. debut.

Looking Ahead

Over the next four quarters, CBRE predicts hotel occupancy in New York will increase to 53.8 percent—better than the previous four quarters' rate of 50.4 percent, but below the long-run average of 83.5 percent, according to the company’s Q3 2020 Regional Economic Summary. RevPAR change projections are improving, negative 5.9 percent as compared to the past four quarters' rate of negative 52.4 percent, but are lower than the long-run average of positive 1.5 percent.

Perhaps best of all, as of Q3, CBRE found demand growth is climbing, up 12.6 percent versus the past four quarters' rate of negative 40.6 percent, and greater than the long-run average of positive 3.5 percent .

With a solid pipeline underway, Freitag acknowledged the concern over how many of the hotels in the pipeline would actually open. “We are not believers in this argument that [a] tidal wave of closures [is crashing] over the U.S. hotel industry,” he said, pointing out that there will, however, be ownership changes as some owners cannot make their debt services, but most hotels will remain hotels. “If you are coming in as an investor at a low base, you can make these hotels work in this market,” he said, suggesting that the city’s hotel market has not been oversupplied but under-demolished.

“2020 is an outlier, an anomaly, [and] that should not drive investor behavior,” he continued. “But of course it does, and it drives lending behavior.” Lenders may wish to avoid a struggling industry for a time, and Freitag calculated that the number of rooms sold nationwide will not meet 2019 levels until 2023.

Ford, meanwhile, sees the downturn as a “once-in-an-ownership-lifetime opportunity,” with empty hotels that will fill up again as travel resumes. “What are [owners] going to do between now and then to make the cleanest, freshest, safest, most upgraded asset they can push for when that demand returns?” he asked. While the city is currently covered in snow, summer is coming, and the summer months of 2020 had the best operating performance of the year. “That will come again,” he predicted.

This story originally appeared on Hotel Management's sister site Hospitality Insights.