Manhattan hotels unable to push rate during lackluster Q2

Construction never stops in New York, hotels included.

The Beastie Boys once bragged that they "can't, won't and don't stop," which is just one more attribute they share with their hometown, New York City. New York can't, won't and doesn't stop adding hotel room supply to its inventory, and a new report from PwC is showing the impact that 36 months of continuous supply will have on a market—even if it’s among the most prosperous in the world.

During the second quarter of 2017, occupancy in Manhattan increased 1.1 percent. Meanwhile, a year-to-date supply increase on the island of 3.1 percent was offset by a 3.8-percent increase in demand, leaving Manhattan with a 0.7-percent increase in occupancy for the first half of the year. An optimist would point out that all increases are good news, even if they are under a full 1 percent, but Manhattan has also struggled to increase rates. In fact, average daily rate is down 1.5 percent for the quarter, and down 2 percent year-to-date. Moreover, revenue per available room decreased 0.4 percent in Q2 2017, and was down 1.3 percent for the first half of the year.

April was a standout month for both occupancy and ADR in Manhattan, which were up 2.4 percent and 3 percent, respectively. However, performance in May and June trended downward, with PwC pointing to political uncertainty and the potential for reduced inbound international travel as reasons for the decline as well as worrisome trends expected to continue.

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Pricing Powerless

The report goes on to state that "while a lack of pricing power continues to plague hotels throughout Manhattan, occupancy levels continue to support modest growth in RevPAR." This is good news because it's keeping the region's hotels stuffed with guests, but without the ability to drive rates these hotels are in a precarious position if the economy meets a bump in the road, or worse. 

Upper-upscale and upper-midscale hotels saw increases in RevPAR during Q2 of 1.7 and 1.4 percent, respectively, but luxury and upscale hotels saw decreases of 1 and 2.8 percent, respectively. In fact, upper-upscale and upper-midscale hotels also outperformed their luxury and upscale counterparts in RevPAR, seeing gains of 1.1 and 1.9 percent, respectively. Limited-service and full-service hotels, however, experienced mixed results. Both saw decreases in ADR to the tune of 1.2 and 1.4 percent, respectively, and both suffered from a lack of pricing power. Limited-service hotels, however, were able to reap a RevPAR increase of 1.3 percent in Q2, while full-service hotel RevPAR declined 0.6 percent. For the full six months of 2017, limited-service hotel RevPAR was up a modest 0.9 percent while full-service hotel RevPAR fell 1.7 percent.

New York's extensive list of independent hotels actually saw a rare decrease in ADR of 0.8 percent during the second quarter, and chain hotels similarly saw a decrease of 1.5 percent. However, chain hotels experienced a 1.6-percent increase in occupancy while independent occupancy was flat. April, Manhattan's standout month, once again brought in good results to both independent and chain-associated hotels, with RevPAR increasing 5.7 percent for chain-affiliated hotels and 6.3 percent for independent hotels. The good news came to an end in May and June, however, as RevPAR hit the brakes and resulted in an increase of 0.2 percent for chain-affiliated hotels and a 0.8 percent decline for independent hotels.

While digging into the five neighborhoods reviewed for the report, PwC found that the Midtown South neighborhood was the only location in the city where hotels were able to increase ADR in Q2, but it was also the neighborhood with the largest decrease in occupancy and RevPAR during that period. Upper Manhattan saw the best overall performance in Q2, with RevPAR up 1.2 percent as a 4.3-percent increase in occupancy was able to offset a 2.9-percent decline in ADR. The report also found that hotels in the Midtown East neighborhood experienced a curious 5.4-percent increase in occupancy during Q2, as well as a huge 4.9-percent decline in ADR. When looking at the city's numbers on a year-to-date basis, Upper Manhattan was the only neighborhood to benefit from a RevPAR increase: a lowly 0.4 percent.

Building, Not Buying

New York is a complicated, ever-changing market, but one constant is that the city's supply is only growing. Transaction volume in Manhattan began to slow down in Q1 2017, and continued into Q2 with only one hotel transaction taking place in each quarter this year throughout the entire city. For this past quarter, that hotel was the Dumont NYC, a 252-room property that sold for $118 million. 

Compared to the first half of 2016, where 11 hotels were sold, it's clear where the money is going: development. Two hotels opened in Manhattan during Q2 2017: The 229-room Hotel 50 Bowery NYC opened in May, and the 370-room Public Hotel opened in June. 

With hotels unable to push rate and with occupancy essentially keeping pace with supply, operators may want to be wary about the remaining 13 hotels that are expected to open this year between Sept. 17 and Dec. 17.

In 2018, another 21 hotels are on the docket for the city, and PwC's report detailed more than 60 additional hotels in the permitting and planning stages, with tentative opening dates set for 2019. Industry analysts have been unsure of the effect growing supply will have on Manhattan, but right now we're beginning to see it.