When the Marriott Financial Center Hotel reopened two weeks ago, it was a significant milestone for the revival of the downtown New York hotel market, which still is reeling from Sept. 11. Still, the entire metropolitan New York hotel market remains on uncertain ground at the start of 2002, albeit to a lesser degree. The problem here is the continuing weakness of business travel, reflecting the economic slowdown nationwide, and compounded by the effects of Sept. 11.
As a result of the recession, occupancy rates and room revenues softened considerably through 2001, compared with the prior year, and prospects aren't much better at least for the first quarter of 2002.
For buyers who bring a large number of room nights to New York, November and December was a period of uncertainty. In their eagerness to bolster their flagging occupancy numbers, many hotels reportedly cut room rates, in some cases drastically. Initially, buyers with negotiated rates in place were less likely than the leisure market to benefit from these reduced prices. There were reports, however, of hotels offering to reduce negotiated rates—or buyers demanding such concessions—in return for assurances of increased market share. January typically is a quiet month for business travel, so hotels are likely to have only modest expectations for the month.
For 2001, PricewaterhouseCoopers, using data supplied by Smith Travel Research, last month predicted that Manhattan occupancy rates would be 73.3 percent, down from 83.9 percent in 2000. Even more discouraging for the city's hotel industry, said Sean Hennessey, director of PricewaterhouseCoopers' hospitality and lodging practice, Manhattan occupancies in 2002, rather than rebound, were expected to dip even a fraction further to 73 percent.
PricewaterhouseCoopers' revenue projections were equally downbeat. "The average daily rate in Manhattan hotels will be $191.80 in 2001, down from $222.40 in 2000 and is expected to slip a bit more to $191 in 2002," Hennessey said. These kinds of projections should serve to strengthen buyers' negotiating leverage in a market that through 2000 still was considered red-hot. Any added leverage, however, usually assumes buyers are prepared to move market share away from the competition.
Smith Travel data on New York hotels' performance in November confirmed this bleak assessment. Occupancy rates were down 11.4 percent over the prior year, while room rates plummeted 23.6 percent.
Downtown, the 504-room Marriott Financial Center Hotel, located on West Street, down the block from the World Trade Center site, is the first of the hotels damaged on Sept. 11 to reopen. The 561-room Millenium Hilton and the 463-suite Embassy Suites Hotel in Battery Park City, which also is part of Hilton Hotels Corp., remain shuttered with no definite word on their plans. A fourth property, the 817-room Marriott World Trade Center Hotel, which actually was part of the fallen trade center complex, was destroyed.
"We see the reopening as a significant step in the turnaround of downtown," said Roger Borsink, general manager of the Marriott Financial Center and vice president for the Marriott New York portfolio. "Given that we're two blocks from the World Trade Center site, many customers would go back and forth between the Financial Center and World Trade Center properties, depending upon availability, so there's a sense of normalcy returning."
The response to the reopening has been unexpectedly positive, Borsink said. "Guests tell us they just feel it's important symbolically that we came back from the attack. This is still the financial capital of the world; nobody is giving up on that." One of the challenges facing the Marriott Financial Center and the other properties when they do reopen is that an estimated 30 million square feet of office space in the area was lost in the terrorist attacks, displacing hundreds of companies and forcing them to seek alternate space in midtown or other parts of the metropolitan area. Along with the offices went the business travelers who in normal times would be visiting them.
One hopeful development for the downtown real estate market was the announcement last month by American Express that its 3,300 employees would return to their offices in the World Financial Center across from the World Trade Center site, starting in April. There had been speculation that American Express would relocate its headquarters to midtown.
While midtown is expected to be a major beneficiary of companies displaced from downtown—on either a short-term or permanent basis (BTN, Dec. 10, 2001), areas such as Jersey City, N.J., which is located directly across the Hudson River from downtown, are likely to benefit as well. Accordingly, hotels in Jersey City and adjoining communities are expected to see an upswing in buyer interest. After all, as travelers make business appointments at companies that have relocated to new offices, they'll need nearby hotels in which to stay. Ironically, the Jersey City hotel market already was expanding pre-Sept. 11, as many blue chip companies moved their administrative offices across the river in search of less expensive rents.
A 214-suite Candlewood Suites, an extended stay chain, opened in Jersey City nine months ago, joining the 187-room Jersey City Newport Courtyard by Marriott and the 199-suite Doubletree Club Jersey City Hotel. All are midprice properties. An upscale, full-service 350-room Hyatt Regency, however, is entering the market as well, scheduled for completion this summer.
Some of the increased demand for office space will be offset by office buildings that already were under construction and are scheduled for completion this year. This, in turn, will generate business for local hotels. "We're expecting to see some benefit, though it's not yet clear how great the benefit will be, nor when it'll peak," said Robert Bernardo, general manager of the Candlewood Suites. "Much will depend on the resumption of business travel to normal levels, which will depend on when the national economy revives."
Bernardo said the existing Jersey City hotels look forward to the arrival of the Hyatt Regency in the marketplace. "A healthy hotel market has a variety of product at different price points, so a full-service property is welcome." The Hyatt, whose facilities include 19,000 square feet of meeting space, will be located on a pier jutting out into the Hudson.
"As the first and only full-service hotel on the waterfront, we believe there's an enormous opportunity to serve the business travel constituency," said Scott Miller, president of Hyatt. Also at the Hyatt site will be ferry and train terminals that connect Jersey City to Manhattan, which will allow business travelers to conveniently schedule appointments in both Jersey City and Manhattan in a single day.
In fact, even though Jersey City increasingly is thought of as a self-contained business and hotel destination separate from New York, easy access to transportation to Manhattan still is what makes it a viable alternative for many travelers. It's cited as one of the advantages of staying at a property elsewhere on the New Jersey side of the Hudson, a community not far from Jersey City called Weehawken, which is directly across from 34th Street in Manhattan. "Our regularly scheduled shuttle bus to the ferry is a popular feature with business travelers, especially during rush hour at the start and finish of the day," said David Berghorn, director of sales at the 347-suite Sheraton Suites at Lincoln Harbor.
In weighing the challenge New York hotels face post-Sept. 11 and in the midst of a national recession, PricewaterhouseCoopers' Hennessey was realistic in his assessment.
"Whether guests were on business or leisure travel, New York hotels did a good job in getting them back in the door after Sept. 11, but rates have suffered," he said. "Rates, which had been at historic highs in 2000, have now been reset to new lower levels and aren't likely to bounce back soon." This would affect corporate negotiated rates, as well as other rates.
Complicating the situation for the major, multi-brand hotel companies is their exposure in the Manhattan market. "Many hotel companies have made big bets in recent years on being in New York," Hennessey said. In terms of owned rooms in Manhattan, Marriott placed first in 2001 with 4,069 rooms, followed by Starwood Hotels & Resorts Worldwide, 3,455 rooms, and Hilton Hotels Corp., 3,277 rooms.
In terms of rates, Hennessey noted that the aftermath of Sept. 11 wiped out gains that hotel companies had made in recent years. "The estimated average daily rate for 2001, $191.80, is the lowest since 1997," he said.
Looking at Manhattan hotels' 2001 monthly performance, Hennessey said that September usually is a strong month for corporate travel. "It marks the return of a lot of business people getting back on the road after a summer break, so the attacks on Sept. 11 came at the very worst time for the industry," he said.
In the first quarter of 2002, Manhattan hotels will be under continued pressure to increase profitability since room rates are unlikely to change from the reset levels. "Much of the increases in occupancy in the fourth quarter of 2001 were empathy visitors, leisure travelers who were drawn to the city out of a response to the tragedy," he said. "The number of these visitors has started to fall off, leaving the industry concerned about where new guests will come from, if business travel doesn't return to normal levels."