New Supply Finally Could Trigger Some Manhattan Hotel Rate Relief

During the past few years, capacity restraints in the Manhattan hotel market have given hoteliers the advantage in corporate rate negotiations, but buyers may begin to wield a little power of their own with some 15,000 rooms expected to debut in New York through 2011, according to a joint report by Smith Travel Research and HVS Global Hospitality Services. With the bulk of new supply emerging later this year and into early 2009, there is room for relief in fall negotiations.

"Average daily rate growth is going to slow—though it won't be cut [drastically]—and that's where the buyer can come in and negotiate," said Jan Freitag, vice president of global development at Smith Travel Research. With new supply, "it's going to be more competitive, so there may be more bargaining power on the corporate side."

Average daily rate increases have slowed after a 15.5 percent peak annual increase in 2005, according to data from STR and HVS' 2008 Manhattan Hotel Market Overview report, released in June. Both firms predict that annual growth will further slow from a 12.7 percent increase last year to 10 percent in 2008, 6 percent in 2009 and 3 percent increases in 2010 and 2011.

To compete with new supply, Manhattan hoteliers are planning to tweak their marketing efforts. According to the report, which surveyed 43 member hotels of the Hotel Association of New York City and the Big Apple Chapter of the Hospitality Sales and Marketing Association International, 55 percent of respondents will increase their marketing efforts to the business segment.

"Hotels have been doing extremely well, but when there are more offerings, hotels have to start negotiating rates and going after markets that they didn't before," said Roland de Milleret, senior vice president of HVS in New York.

Hoteliers plan other efforts to remain relevant. The report noted that 75 percent of respondents plan renovations to compete with the supply increase; 68 percent plan to increase amenities; 40 percent plan to implement and/or increase customer relationship management programs; 38 percent plan to reposition their brand and/or market segment; while 5 percent have no specific tactics planned.

New supply and the competition it creates may be buyers' only bargaining chip in New York's strong seller's market. Demand for Manhattan hotel rooms shows no signs of slowing. "Given the deterioration of the dollar against the euro, America is pretty much on sale" to European travelers, Freitag said.

Business travel to the Big Apple also remains steady, even as some companies cut back. "New York does not rely on just one sector," said de Milleret. "San Francisco used to rely on the technology industry, and when there was the crash, hotel business suffered. In New York, finance, advertising, media and tourism all are big components, so it's a market that does not suffer as much when there is a recession. It turns around much faster than any others."

The only effect the weak economy could have on new supply is in project financing. "Construction costs are on the rise and financing rates are much higher—and that's if you are lucky to get it," said de Milleret. "Some of these planned hotels will find the financing to make the project happen, but some will not, so we may have less supply then what's originally indicated."

Occupancy rates are expected to drop, but not by much, as rooms across all segments are likely to be absorbed quickly. "We're talking about occupancy decreasing that's at very high levels," said John Fox, senior vice president of PKF Consulting in New York. "It probably will bottom out at about 80 percent, which is still very strong."

Much of the supply that came online in 2007 was limited-service, as there are fewer barriers to entry at that level, according to the STR and HVS report. Of the anticipated new projects through 2011, 28 hotels, or 35 percent of the total new supply, are midprice hotels, the report noted. Boutique hotels make up a similar portion of the proposed projects, while only six luxury hotels are slated, not including reopenings.

"There has been a lack of moderately priced product in Manhattan in the past few years," said Fox, "and this change will add product at a price point that a lot of people are looking for."