Manhattan Hotel Heat Warms 'Burbs, Outer Boroughs

With the New York hotel market bursting at the seams and new hotel sites in midtown Manhattan in short supply, developers are increasingly turning to locations in downtown Manhattan, Brooklyn, Queens and the New York and New Jersey suburbs. Increasingly, these will be the places where New York-bound business travelers, shut out of Midtown by either cost or availability, will turn to as alternatives.

"As hot as the hotel market is in Manhattan, the residential market is hotter, so most development sites go for residential projects," said hospitality industry consultant Sean Hennessey, president of New York-based Lodging Investment Advisors. "So we're starting to see development in nontraditional locations."

The development shift is happening at a time when there is no end in sight to the hotel squeeze in New York City where, according to data from Smith Travel Research, occupancy percentages in 2005 averaged in the mid-80s and the average daily rate climbed to $211. According to Kirk Reed, a consultant with the PricewaterhouseCoopers hospitality and leisure practice in New York, hotel rates in the city are expected to increase another 15 percent in 2006, while occupancies will decline by just one-half of 1 percent.

Similarly, John Fox, senior vice president of PKF Consulting in New York, predicted rate increases of more than 10 percent this year with just a modest decrease in occupancy levels. Even with 3,000 new hotel rooms scheduled to open in New York City this year—1,200 in boroughs other than Manhattan—demand will continue to exceed supply, he said.

"We've lost 3,000 to 4,000 rooms over the past few years and we're starting to make this up, but not enough to take care of the significant increase in business travel," said Fox. "We're not going to see much of a real dent in occupancy levels. We will stay above 80 percent for the foreseeable future. The situation will stay very challenging for the buyer."

Both Fox and Reed noted the trend for most new hotel development in New York City to take place in lower Manhattan or in the outer boroughs. "Right now, 71 percent of all New York City hotels are north of 34th St., but since 1999 only 45 percent of new rooms have been built there," said Reed. "About one-third of new rooms are in development below 34th St. and one-quarter of them are in the outer boroughs."

In particular, lower Manhattan, including Tribeca, the Financial District and the Lower East Side, is a hot spot for new development, although most new properties are small. "A lot of the buildings in lower Manhattan are suitable for hotel conversions in the 80-to-200-room range," said Reed, adding that the area is attracting a mix of independent boutique hotels and well-known brands, such as Hilton Garden Inn and Hampton Inn.

Examples of small hotels scheduled to open in lower Manhattan this year include the 83-room Downtown Hotel, the 150-room Hilton Garden Inn Tribeca, a 152-room Four Points by Sheraton, the 112-room Allen Street Hotel and a 188-room Holiday Inn Express. Midtown Manhattan hotels scheduled to open this year include the 204-room Courtyard by Marriott Harlem, the 186-room Gramercy Park Hotel, the 90-room 6 Columbus Circle, a 92-room Wingate Inn and a 70-room Comfort Inn.

Next year, additional Manhattan hotel room inventory will come from the reopening of The Plaza hotel, which will be comprised of 350 guest rooms and 150 residential apartments, and the opening of several new hotels, including a 175-room Sheraton Hotel on West 28th St.; a 250-room Sheraton Four Points and a 250-room Fairfield Inn, both at 8th Ave. and 40th St. and the 344-room The Standard on West 13th St.

Outside Manhattan, the boroughs of Queens and Brooklyn are emerging as popular spots for new hotel development. The largest new infusion of rooms will come this fall from the expansion of the New York Marriott at the Brooklyn Bridge, which will offer an additional 282 rooms for a total of 658. The Brooklyn property also will get an additional 2,000 square feet of meeting space. New hotels opening in Brooklyn and Queens this year include the 93-room Smith Hotel, the 90-room Holiday Inn Express Brooklyn, the 136-room Wingate Inn LaGuardia and the 220-room Hampton Inn LaGuardia Airport.

According to Hennessey, several new hotel projects, including large full-service properties, are likely to be announced in the near future in both Brooklyn and Queens. "There's a lot of rezoning going on in Brooklyn and Queens and a lot of interest in hotel development there," he said. "They offer the advantages of subway access and airport-related business. In particular, there will be a lot of new activity at LaGuardia and JFK airports."

Among suburban locations, it is northern New Jersey, which saw the opening of the Hyatt Regency Jersey City in 2002, where the bulk of new hotel development is happening. "There's a lot of interest in development sites in places such as Hoboken and Jersey City, places where you can get a ferry into lower Manhattan," said Fox. "We are working with a client now who wants to develop a full-service hotel in Jersey City."

Among new projects underway is the 225-room W Hoboken Hotel and Residences, a waterfront property in Hoboken that will include 11,000 square feet of meeting space and a full-service Bliss spa when it opens in mid-2007. Major developments in the planning stages include 2,750 hotel rooms scheduled to be part of a massive redevelopment plan for the New Jersey Meadowlands, a 30-sq.-mile region just a few miles west of Manhattan.

According to Hennessey, these and other New York suburban hotel developments will appeal not only to people priced out of Manhattan. "The market for suburban locations continues to grow also because more business is taking place outside of Manhattan," he said. "For instance, there are a lot of financial offices located in Jersey City."

However, hotels developed in the suburbs will indeed offer a respite from high Manhattan rates and occupancies. "Most hotels in the New York suburbs are still in the early stages of recovery—it's a market not nearly as robust," Hennessey said. "If Manhattan occupancies are in the mid-80s, these places are in the mid-70s. There is also a dramatic difference in room rates."

At the same time, room rates within New York City itself may not vary all that much between boroughs, according to Reed. "The average rate in Manhattan in 2005 was $232, while it was $211 for New York City as a whole," he said. "There's not a huge difference. However, availability is definitely better outside Manhattan."

While hotels may be easier to build outside New York City, the consultants also noted that hotel developers are facing challenges in the suburbs, particularly in Westchester County, N.Y., where hotels are competing with residential developments much like they are in Manhattan. "In general, sites in the New York suburbs are not that easy to come by," said Fox.