FEATURE ARTICLE, OCTOBER 2006

HOSPITALITY UPDATE
The hospitality industry in the Northeast may experience a slight downturn, but the good times will continue.
Stephanie Mayhew

The hospitality industry has been riding the wave of economic success for the past few years, enjoying high room and occupancy rates as well as robust development activity. As the end of 2006 approaches, experts in the lodging industry are calling for a slight slow down, but fortunately for hoteliers the good times will continue.

Occupancy Rates and Profit

For the past 3 years, the U.S. lodging industry has seen highly favorable increases in occupancy rates, but as the  industry approaches the peak of the business cycle, lodging experts are calling for a slight downturn in the current market. In the 2006 edition of the Hotel Outlook, PKF Hospitality Research (PKF-HR) and Toro Wheaton Research are calling for a 0.6 percent decline in occupancy for the largest U.S. lodging markets. However, hoteliers will see continued growth in revenues and profits as the average occupancy rate for 2007 is projected to be a robust 68 percent. To put this number in perspective, the long-term average for the hospitality industry is 66.4 percent.

According to PKF-HR’s 2006 Trends In the Hotel Industry, by the end of 2007, the operating profit for the average hotel will be up 9.8 percent from the year-end estimates for 2006. Thus, by the end of 2007, the average hotel in the U.S. will achieve an operating profit of $15,996 per available room. However, the experts at PKF-HR note that this projected profit is only slightly above the $15,674 that was seen in 2000, and the industry is still recovering from a tough cycle. PKF-HR forecasts a 6 percent increase in total revenue from 2006 to 2007 and projects that room revenue will grow by 4.9 percent. Hoteliers will not only see an increase in total revenues from the number of rooms they rent out, but they will also see an increase in revenue from the growth of sales in food, beverage, retail and recreation. It is obvious to see that the lodging industry in the U.S. will continue to thrive, but it is also important to realize that each market has its own individual ebb and flow.

New York Market

The hospitality market in New York City has created a generous amount of buzz with record room rates, phenomenal increases in occupancy and a flurry of development activity. John Fox, senior vice president in PFK Consulting’s New York office, says, “In 2007 New York City will continue to see an increase in room rates, roughly about 10 percent; however, this number is down from the 20 percent increase that was seen last year.” In addition, Fox notes that the level of occupancy will also soften a bit from roughly 85 percent to 83 percent. “Hospitality is a very cyclical industry and it can be very difficult to sustain the high levels we have seen during the last few years. In terms of occupancy, we are somewhat beyond the peak, but I don’t think we are beyond the peak for rates yet,” says Fox. “There is still a lot of profit to be made. Even if the industry dropped back to a 5 percent room rate increase against a 3 percent inflation rate, that still does wonders for profit.”

During the next 3 years, New York City will see an increase of about 6,000 rooms; however, this increase will only replace what has been lost. “Over the last few years, the hotel industry has lost 4,000 to 5,000 rooms to conversion for residential use, ” says Fox. The conversion of hotels for residential use has become a fairly popular trend in urban areas, specifically in Manhattan because of the extreme residential/condominium pricing.

The added supply that Fox refers to are almost all midscale and select-service new-build hotels. Nevertheless, there are very few new-builds in the prime midtown area. Most have moved out into secondary and tertiary areas such as Chelsea and lower Manhattan because of limited space.

Another unique trend that is becoming increasingly popular in urban areas is hotels with private residences. According to a mid-year report from Lodging Econometrics, there are 150 hotels with private residences in the pipeline. Of that number, 51 are under construction, 57 are scheduled to start construction in next 12 months and 42 are in the early planning stages. Most of these projects are in the upscale and luxury segment in major cities such as New York City, Boston, Chicago, Miami, Orlando and Seattle. According to the Lodging Econometrics report, hotels with a residential component provide early cash streams, making them a favored strategy by high-end developers and lenders.  

“With the extreme occupancies in Manhattan, business has been pushed into the surrounding boroughs, Jersey City, New Jersey, and even as far out as the Newark airport,” says Fox. For example, the Brooklyn Marriott is currently undergoing a 24-story expansion, which will add 282 additional guestrooms and retail space. Many of the boroughs that have had very few developments in the past are now constructing smaller, limited-service facilities. “This is a result of business being pushed to the outer boroughs from Manhattan, but in areas such as Long Island City there is a greater development of office space; thus, demand has been created within the boroughs themselves for more hotel supply,” says Fox.

For the most part, the new developments within the New York City market are limited-service, select-service brands. This is a unique and growing trend in a market that was once exclusive to upscale and luxury developments. “The major reason for this is because they are generally smaller and can be developed for less cost. It is very difficult and costly to develop a new luxury hotel, so by nature this type of development is very constrained,” says Fox. “Manhattan in particular has not had a large number of the type of hotels that you would find in suburban markets. It was not too long ago that we got our first Hampton Inn or Holiday Inn Express in Manhattan.”

According to Fox, one of the main reasons for the development of midscale brands is because room rates have finally been driven to levels that enable developers to be able to afford to build again. Another reason is the consumer demand for a more affordable brand. “As room rates continue to rise to such high levels in Manhattan, we are beginning to see rate resistance from customers, and a demand for more moderately priced hotels,” says Fox.

Bruce Ford, senior vice president of Lodging Econometrics and Hotel Real Estate Research Authority, notes that most of the properties that are being constructed in New York City are between 125 to 225 rooms with a midscale flavor. “They are not only more affordable, but require a smaller footprint, which works well in urban centers where land is scare and very expensive,” says Ford. “In addition, midscale hotels are also more financeable.”

Boston Market

The Boston hospitality market has been experiencing a significant amount of growth this year with the recent completion of the new Boston Convention & Exhibition Center and other new hotel developments. A new 800-room W Hotel is set to open next to the convention center, and a new 424-room InterContinental Boston is scheduled to open in November. “Boston had somewhat lagged behind New York in the recovery of its hotel business post 9/11, but this year the city has seen a real resurgence. The convention market has been very strong and Boston is also riding the general tide of economic recovery as well,” says Fox.

According to Ford, the development in downtown Boston is a result of the Rose Kennedy Greenway, otherwise known as the “Big Dig.” The new greenway has opened up a tremendous amount of once unusable space with an expansive public area that runs right through the main vein of downtown Boston. “Because of this project and the new convention center, Boston is experiencing a downtown redevelopment renaissance unlike anywhere else in the U.S.,” says Ford. 

Other Major Markets

Urban centers are not the only markets in which the hospitality industry is experiencing a boom in rates, occupancy and development. Secondary and tertiary markets throughout the Northeast are making positive headway in terms of rates and development.

According to Fox, Jersey City has a fairly limited supply of existing rooms, but as office and residential construction continues to grow, the hospitality industry is beginning to catch up to meet the demands of the surrounding market. The Jersey City Westin, for example, broke ground in June, and is slated for completion in 2008. Part of the Newport mixed-use development, the 26-story hotel boasts 429 rooms, a conference center, banquet facilities, a 10,000-square-foot ballroom, a pool and fitness center and a 5,000 square-foot specialty restaurant.

Hartford, Connecticut; Providence, Rhode Island; and  Albany, New York, are all markets that are experiencing a moderate amount of hospitality development. A boutique hotel is underway in Albany, and a proposal has been made in Providence for a new hotel next to the convention center. The Philadelphia hospitality market only has a few occupancy points left, and  will remain strong in the next couple of years. Long Island, New York, has added a fair amount of supply in the last few years and continues on a healthy track.

Development Activity

As in other sectors of the commercial real estate industry, a healthy amount of development is projected to continue in the hospitality sector. “The combination of the rise in interest rates along with the rise in construction costs might slightly slow down further development, but is certainly not a major concern and will not stop momentum,” says Fox.

Ford believes the current rate of development will continue and there will be more large-scale projects  announced in the next few years. “This is indicative of where we sit in the real estate cycle, and it is indicative of the types of developments that people are going for now,” says Ford.  “In addition, as construction costs begin to settle down, large developments in urban centers are becoming much more financeable for lenders. All in all, construction totals will rise but they will not outstrip demand for the foreseeable future,” says Ford.

Areas of Concern

An area of concern for hoteliers across the U.S. is the increase in operating costs. PKF-HR is projecting that the cost of operating a hotel in the U.S. will increase by 4.5 percent. One of the major causes for this increase in operating expenses is the increased cost of labor, which accounts for 44.4 percent of the total operating costs. In addition, fixed operating costs such as franchise fees, management fees, property taxes and insurance also greatly affect overall operating costs. Ford notes that  an area of concern for hoteliers in the Northeast is the overall cost of development. “The numbers that you work with in the Northeast are dramatically different from anywhere else in the U.S. because the cost of land is higher, you are buying into a higher occupancy and a higher rate market,” says Ford.

The hotel business is parallel to the economy of its market and the overall economy of the U.S.; thus, in the absence of a major event, the hospitality industry will continue to thrive and profit in the Northeast.

STARWOOD HOTELS WORLDWIDE The first of Starwood Hotel’s new upper, upscale extended stay brand, code-named Project ESW, will open up in Lexington, Massachusetts in late 2007. Starwood Hotels & Resorts Worldwide has unveiled plans for a new upper, upscale extended stay brand. The new brand, which as of press time had not received an official name and is code-named Project ESW, will feature a residential design and products designed with the long-term guest in mind. The brand will consist of only new-build developments with contemporary urban-inspired studios and one-bedroom suites. Project ESW was inspired by Westin Hotels and will include many of the Westin’s signature amenities such as the Heavenly Bed, Heavenly Bath and the Westin Workout Powered by Reebok. Guestrooms feature large kitchens with stainless steel appliances, in-room offices and custom-designed closets and built-ins. Other amenities include lobbies designed with a variety of seating options, landscaped terraces and pools, and gourmet pantries with local micro-brews, local wines, a variety of healthy food options and upscale dinner selections. And like other Westin hotels, the Project ESW brand will be smoke free. Costas Kondylis, a Manhattan-based residential architect, will design the new hotels, and AvroKO will design the interiors. The first Project ESW hotel is slated to open in 2009 in Lexington, Massachusetts. Starwood has targeted more than 150 markets and forecasts executing approximately 25 agreements per year in the next 5 years. In addition, W Hotels has announced plans for the development of W Hotel & Residences in downtown Philadelphia. The new hotel will feature 250 luxury guestrooms, which will include 26 suites, three Wow suites and one Extreme Wow suite, plus 95 W Residences, featuring one- and two-bedroom condominiums. Residents will have access to all of the property’s amenities including maid service, 24-hour room-service, and W’s own Whatever/Whenever concierge services. Other amenities include the 6,500-square-foot Bliss Spa, 11,000 square feet of meeting space, a signature bar and restaurant with an outdoor garden, W Hotels the Store and SWEAT, a fitness facility. The hotel will be located in Center City Philadelphia at the southwest corner of Arch Street and 12th Street. Starwood Hotels and Resorts Worldwide, the parent company of W Hotels, has partnered with 1200 Arch Street Associates, a joint venture between Urban Residential and Parkway Corporation, to develop the project.  — Stephanie Mayhew

RITZ-CARLTON HOTEL COMPANY The Ritz-Carlton Westchester and The Residences at The Ritz-Carlton in White Plains, New York, will feature 123 guestrooms and 400 private condominiums. The Ritz Carlton Company along with developer Louis R. Cappelli is constructing The Ritz-Carlton Westchester and The Residence at The Ritz-Carlton in White Plains, New York. The development, designed by the architectural firm Costas Kondylis, will consist of two 40-story towers that will contain 123 guestrooms and more than 400 private condominiums. The two towers will rise from the 10-level hotel podium with the residences occupying floors 11 through 40. The project is slated to open in early 2008. The hotel and residences are part of Renaissance Square, a 940,000-square-foot complex that will also contain a 10,000-square-foot spa, a fitness center, two fine dining restaurants and 10,000 square feet of meeting and special event space. Renaissance Square is being developed by Louis R. Cappelli.  — Stephanie Mayhew

CARLSON HOTELS WORLDWIDE The Radisson Hotel Carteret in Carteret, New Jersey boasts 117 rooms, 3,700 square feet of meeting space, banquet space and complimentary shuttle service. Carlson Hotels Worldwide recently completed $10 million in renovations on the historic Martinique Hotel. Reflagged as the Radisson Hotel Martinique New York-Broadway, the hotel is centrally located on the corner of Broadway and 32nd Street on the west side of midtown Manhattan in the heart of New York City. Originally built in 1897, the renovation maintained the hotel’s French Renaissance architecture by preserving the marble winding staircase and the original mosaic tile floor in the lobby. The hotel boats 532 newly renovated rooms that include guestrooms, suites and an atrium penthouse with views of The Empire State Building. The rooms feature wireless Internet access, two-line phones,  Sony playstations, flat-screen televisions, plus several of the rooms will feature the signature Radisson SLEEP NUMBER beds. Other upgrades to the hotel include 14,000 square feet of flexible meeting space that includes a grand ballroom with breakout rooms and an executive boardroom. The owners also plan to add an additional 6,000 square feet of meeting space. Other amenities include wireless Internet access throughout the entire hotel, a business center, a fitness center, three restaurants — Kum GangSan, Cafe Martinique and a new French bistro — and the International Day Spa. The Radisson Hotel Martinique New York-Broadway is owned by Herald Hotel Associates. The Radisson Hotel Carteret, a new-build hotel owned by Muer Management, has opened its doors at 30 Minute Street in Carteret, New Jersey. The 117-unit hotel offers standard guestrooms, plus executive two-room king suites and jacuzzi king rooms. All rooms contain in-room safes, SLEEP NUMBER beds, coffeemakers, irons and ironing boards and two-line phones. The hotel also provides complimentary wireless Internet access throughout, 3,700 square feet of divisible meeting space, banquet space for up to 200 guests, a fitness center, a full-service business center, complimentary shuttle service, and Yogi’s All American Grill & Sports Bar.  The Radisson Hotel Carteret is also minutes from downtown Manhattan, The Jersey Shore Points, Giants Stadium and The Statue of Liberty. — Stephanie Mayhew

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