Weak N.Y. Hotel Climate Keeps Giving Buyers Upper Hand

Business travel buyers should continue to have the upper hand in negotiations for their Big Apple lodging needs, assuming they can deliver on their room night projections.

New York hotels started 2003 on a down note, despite hoteliers' hopes that the new year would usher in the start of an industry turnaround. Projections for all of 2003, meanwhile, suggest this will be another difficult year. According to Smith Travel Research, New York occupancy rates for January were 59.6 percent, down 1.7 percent from the same month last year. The drop in revenues per available room were even more dramatic, falling 6 percent over January 2002.

By contrast, January occupancies for the top 25 U.S. cities, which includes New York, was 53.8 percent, up 0.4 percent from the prior year, while RevPAR for the month was flat year over year.

January, however, typically is a slow month for business travel and the industry's performance is expected to improve later in the year. "Looking to 2003, we've estimated that Manhattan occupancy rates will reach 76 percent for the year, still significantly below 2000's record-breaking levels," said Sean Hennessey, consulting director of the hospitality and leisure practice at PricewaterhouseCoopers. In 2000, occupancies hit 89.3 percent.

From a more modest perspective, occupancy rates in the mid-70 percentile may not be so disheartening. "These were still pretty healthy occupancies for 60,000 hotel rooms," said John Fox, senior vice president of PKF Consulting. "There were a lot of markets around the country that would love to have that kind of record. The numbers look poor to us precisely because of the kinds of occupancies we saw in 2000. Occupancies in the mid-70s put us back to 1997-1998 levels."

Rate may be a different matter. In hindsight, many analysts believe Manhattan hotels cut back too severely on room rates in the months following Sept. 11, 2001. This was their strategy for helping drive occupancy, but it may have backfired. "The gut reaction was to cut rates, which is always the reaction in these situations," said Daniel Lesser, managing director of the hospitality industry group at Cushman & Wakefield. "It's an attitude that starts to feed upon itself after awhile."

Yet, average daily rates have been painfully slow to recover as a result. "It's always easy to cut your price, whether you're selling cars, widgets or hotel rooms. It's much harder to raise your price," Lesser said. "That's what we've seen lately."

For 2003, PwC said it expected average daily rates to reach $192, the same amount as in 2001. By contrast, Smith Travel noted that Manhattan average daily rates in 2000 were $222.

The RevPAR picture actually brightened toward the end of 2002. In the last four months of the year, in fact, PwC said RevPAR rose an average 16 percent. "It seems we had a bounceback, but it was not nearly robust enough to compensate for the downturn earlier in the year," Hennessey said.

Among price points, deluxe properties suffered the most in 2002. "Rates really dampened at the high end," he said. "When the market was at its peak in 2000, some of the best hotels in town had average daily room rates of about $700. In 2002, some of those same hotels averaged less than $300."

The drop in high-end business travel has been the primary culprit. "The difference in rates has been really dramatic, especially on the volume corporate side of the business," Hennessey said.

At the same time, hotels at the very bottom of the price ladder suffered occupancy and revenue losses as well. "These are the hotels where rooms are under $125 a night. Of the New York hotel rooms we track every month, roughly 10 percent fall into this category," Fox said.

What's bad news to some has been good news to others. "This might be music to travel buyers' ears, but for the hotel industry it's been a thorn in the side," Lesser said.

Fox noted that, given 2002's market conditions, the usual price point distinctions often blurred. "In many cases, the luxury end came down in rate and captured some of what previously was in the middle of the market," he said.

Simultaneously, rate compression occurred in the middle of the market. "Consequently, there were business travelers who paid low rates before and traded up a bit to a better class hotel for a similar price," Fox said.

At the end of 2002, Hennessey said he expected any improvement in 2003 revenues likely to be in the first quarter. "In the first three months of 2002, we were still experiencing the aftereffects of Sept. 11. This comparison wouldn't be nearly as pronounced in 2003," he said.

Beyond the first quarter, Hennessey said he was even less optimistic. "A lot of hotels are expecting the market to be just as bad as last year, if not slightly worse."

Consequently, many hotels have adjusted their marketing strategies. "New York and other fly-to hotel markets here reengineered where their marketing dollars are being spent," Lesser said. "As opposed to going to the international traveler or even the domestic flight passenger, hotels have gone after the drive-to business, especially on the group side. 'What's within 250 miles of us that we can lure down here?' " he said.

One factor that has thrown a wrench into Manhattan hotel economics this year is hikes in property taxes. In a major scandal in 2002, many New York City property tax assessors were arrested in a kickback scheme. "Consequently, the city agreed to a 18.5 percent property tax increase. This is not a topic that typically has been high on New York hoteliers' radar screens, but given that profitability is down as a result of lower room revenues, the jump in property tax suddenly became a big issue," Hennessey said.

Hennessey and Lesser were equally circumspect regarding Manhattan transactions and construction. In terms of new construction, 2002 was a significant year because a number of large full-service projects that were already in the pipeline opened, such as the 509-room W Hotel Times Square, two Ritz-Carlton Hotels totaling 575 rooms and the 863-room Westin New York Times Square. Yet, the development engine now has slowed considerably. In fact, the only major project presently under construction is the 251-room Mandarin Oriental New York scheduled to open late this year or early 2004 as part of the AOL Time Warner Center at Columbus Circle.

"There's been a lot of talk about new development, but little action," Hennessey said. "The pipeline for most projects has gotten longer than it has been in the past five years. Simply put, nobody has financing for many of these projects."

Many of these projects also aren't in the most desirable, high visibility locations. "With secondary or tertiary locations, the barriers to entry tend to be less severe, so development can proceed more easily."

Chief among these projects, both Hampton and Four Points by Sheraton—midprice brands of Hilton Hotels Corp. and Starwood Hotels & Resorts Worldwide, respectively—will open hotels in the coming months in Chelsea. In each case, the property is the brand's first Manhattan outpost.

Developers want to stay ahead of the curve. "Ideally, you don't want to be opening a new hotel in the middle of another boom," Fox said. "You'd actually like to be ready to ride that boom up. Accordingly, it makes a lot of sense to start thinking about the future now."