HSMAI Luncheon - October 2008

Yesterday I presented some data on the New York City hotel market at a luncheon for the New York City chapter of Hospitality Sales and Marketing Association International. While not a formal speech, the following notes summarize my comments.

Much has been written about the drop off in the hotel business during the first half of October. The following chart visually presents the trend line in room revenue per available room in Manhattan over the past few years up to mid-October.

Part of this month's drop off in RevPAR is due the fact that Rosh Hashanah was in October this year, whereas it was in September last year. It appears that part is also due to a sudden drop in corporate travel as companies dealt with the upheaval in the financial markets. It will take hotels a short while to replace corporate travelers with tourists or group meeting customers, but it appears that most hotels will be able to effect such a change. Many hoteliers report that the fall and holiday periods look strong, so we do not expect the decline seen during the first half of October to signify that the market has changed for good.

I also presented an updated pipeline summary that is cleaned up from earlier presentations. This table is for the 5 Boroughs of Manhattan and does not include close-in suburbs normally part of Smith Travel's pipeline reports.

There are roughly 23,000 rooms planned but not under construction for NYC. According to Smith Travel Research, 22% of hotels in final planning don't get built on average, 54% of hotels in planning don't get built, and 72% of hotels in pre-planning don't get built. I suspect these attrition rates will be higher now, since the market for hotel construction financing has been severely affected.

Finally, I presented data for average daily room rates and hotel profitability to show how New York hotels have performed when inflation is taken into account. The following two charts tell the story. Hotel room rates are only slightly above where they were in 2000 on an inflation-adjusted basis, and hotel profitability is still only about 85% of what it was in 2000 on an inflation adjusted basis. Hotels have seen certain expenses, such as labor, food costs, utilities, and insurance rise faster than inflation, eroding profitability.

A Clarification

I've received a few calls over the past few days from colleagues saying I'm predicting doom and gloom based on the recent articles in Crains New York Business and The New York Times (see prior posts.) Rather, my point is that regardless of the state of the hotel industry, raising occupancy taxes will discourage travel to NYC.

Most hotels are relatively sophisticated in controlling expenses relative to demand. Therefore, a downturn in the hotel business will quickly be felt by room attendants, cooks, and other staff.

In other words, a tax on hotels is not simply a painless way to foist some of the costs of government onto tourists who aren't locally registered voters. Rather, increasing occupancy taxes on hotels swiftly impacts many hard working middle class New Yorkers.

Hennessey in the News, Crains, 10-19-08

Crains New York Business

Hotels struggle to fill rooms

By Lisa Fickenscher

Published: October 19, 2008 - 5:59 am

Kevin Smith, the general manager of the sprawling New Yorker Hotel near Pennsylvania Station, got a jolt last month that reminded him of the weeks following Sept. 11, 2001.

When the Dow Jones industrial average plummeted 504 points on Sept. 15—a reaction to the Lehman Brothers bankruptcy and the sale of Merrill Lynch—the hotel was immediately flooded with calls from people canceling their reservations. By the end of the day, the hotel had 17 more cancellations than bookings, a rare occurrence.

“That was a warning signal for us that we needed to make plans for a difficult time,” says Mr. Smith.The veteran hotelier has plenty of company.

The carnage in the stock market over the past two weeks is rapidly showing up in hotel occupancy rates across the city. Nervous travelers, from foreign visitors to business executives and families, are scrapping trips to the Big Apple; and others are shying away from making long-term plans to come here. Hotels are struggling to fill rooms in November and beyond, slashing rates and ripping up budgets for next year, because previous forecasts are no longer relevant.

“There is a noticeable decrease in demand for New York City,” says Michael Stengel, general manager of the Marriott Marquis hotel in Times Square. “The financial markets have scared off a lot of different companies that we do business with."

October ushered in a new chapter for an industry that has enjoyed a five-year run of record-setting growth. During the first half of the month, hotel occupancy rates in the city declined more than 11% each week, compared with the same period last year, according to a report by J.P. Morgan Chase and Smith Travel Research.

“If this continues through the rest of the month, then it would be the biggest decrease since the immediate aftermath of 9/11,” says John Fox, senior vice president at PKF Consulting, a hotel advisory firm.

The declines are sobering hoteliers who for the past several years feasted on giddy European shoppers who came here to take advantage of the weak dollar. With the financial crisis spreading globally and the euro losing strength relative to the dollar, the cost of a hotel room in the city is expected to rise by 20% over the next six to 12 months.

Hoteliers are already feeling the pain. John Fitzpatrick owns two eponymous hotels in Manhattan that attract a large following from Ireland, which is facing its own real estate crisis now. One of his properties, on Lexington Avenue between East 56th and East 57th streets, was in the midst of an exterior renovation when Mr. Fitzpatrick pulled the plug on the project after a large group canceled its October reservation.

“I've stopped all construction at the Fitzpatrick Manhattan,” he says. “I'm going to hold back two or three months to see what happens.”

Mr. Smith of the 912-room New Yorker Hotel says that November looks “weaker than we would like.” At the Roosevelt hotel, another large midtown property on the East Side, management is responding to the dip by lowering its rates and offering more rooms to discount travel services.

“We've had to reduce our pricing to remain competitive,” says Kevin Croke, director of sales and marketing. Properties across the city are dropping their rates by about 10%, he says.

One of the big questions for hoteliers is whether the slowdown in reservations indicates that people are not planning to come to the city at all or whether they are waiting until the last minute to decide. Typically, hotels look at windows of 30 to 90 days to gauge demand and set their prices.

“Right now, there are a lot of guessing games going on,” says Mr. Stengel.

The Waldorf-Astoria is still counting on foreign travelers to see it through this uncertain time. Starting last March, the property began funneling more business to discount tour operators abroad.

The U.S. market is a different story. “The demand we are seeing from the domestic business traveler is absolutely contracting,” says Matt Zolbe, director of sales and marketing for the Waldorf-Astoria.

WRONG SIDE OF BED
NYC hotels saw a downturn in business in the first two weeks of October.
Average room rate -6.5%
Occupancy rate -11%
Hotel room revenues -17%
(Compared with results from the same period in 2007.)
Sources: J.P. Morgan Chase and Smith Travel Research
_______________________________
NO ROOM FOR TAX HIKE
HOTELS ARE INCENSED about a proposal that could raise the city’s hotel room tax by as much as 3 percentage points, to nearly 18%.

The idea has the support of some City Council members as a way to close the city’s widening budget deficit. But the issue is taking on greater urgency now as the hotel industry faces mounting problems of its own.

“This is not the time to raise taxes, when the hotel industry is vulnerable to a severe economic situation,” says Joseph Spinnato, chief executive of the Hotel Association of New York City.

Hotels are an easy target because the people who pay the tax don’t live here. Last week, Mr. Spinnato sent the mayor and the City Council speaker a white paper showing that a tax increase would keep people away from New York and result in job losses.

Hotel guests currently pay a 14.54% room tax, which adds, for example, $43.03 to a room costing $296—the average New York City hotel room rate during the first eight months of this year.

COMMENTS? LFickenscher@crainsnewyork.com

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Sean Hennessey of Lodging Advisors LLC prepared the research cited by the Hotel Association of New York City cited in this article.

Hennessey in the News, New Yok Times, 10-18-2008

The New York Times

October 18, 2008

Troubles for New York Hotels

By CHARLES V. BAGLI

The city’s hotels, whose 77,000 rooms have been packed with record-setting numbers of visitors from Germany, Hong Kong and Peoria, are starting to feel the slowing economy.

Until recently, tourism had been a bright spot in the city’s increasingly gloomy economic picture, fueled largely by foreign tourists taking advantage of a weak dollar.

But many hotel operators have begun reporting that bookings for the next few months, traditionally the strongest part of the year, are falling below last year’s levels. Cancellations are also on the rise, and corporate travel executives are negotiating for steeper discounts on room contracts for 2009.

“We’re already seeing cancellations,” said Vijay Dandapani, chief operating officer for Apple Core Hotels, which has five budget hotels in Manhattan with a total of almost 800 rooms. “There’s hesitancy in bookings. We hold our breath and fill up rooms at the last minute. Occupancy has been weaker in October, traditionally one of the strongest months.”

John Fitzpatrick, president of Fitzpatrick Hotels, an Irish chain, said that the three hotels he operates in Manhattan were nearly full Wednesday night, but that he was seeing a “slowdown in November bookings, with people canceling or holding back.” He said that he was redrawing his budget for next year in anticipation of a decline, and that he had postponed finishing a $4 million renovation of one hotel, the Fitzpatrick Grand Central.

For the first time since 2001, the effective cost of a New York hotel room for a European traveler is going up, because the dollar has gained strength against the euro in recent weeks, according to the Hotel Association of New York City. At the same time, a recessionary wave has started to move across Europe.
American companies under financial pressure are also placing greater restrictions on corporate travel.

The situation is not yet dire. Although Apple Core’s occupancy is down 10 percentage points from over 90 percent during the same period last year, it is still better than in most other American cities.

But no one knows whether it is a temporary or long-term trend. Mr. Dandapani, Mr. Fitzpatrick and other operators fear that falling bookings and rising cancellations hint at a downturn for one of the city’s most robust industries. Hotels have been full more than 200 days a year for four years, and the average room rate has soared 48 percent since 2004 to $302.52 last year, according to PKF Consulting, a national research and hotel advisory firm.

“The last two weeks have seen occupancy drop substantially over the same period last year,” said John A. Fox, senior vice president at PKF. “We are way down, but down to levels other cities would give their right arm for.”

The average occupancy rate at New York hotels was 86.5 percent last year, and had been on pace to be higher this year. In August, for instance, it was 92.4 percent, up from 90.1 percent in August 2007, according to PKF Consulting. The average room rate, $304.52 in 2007, was the highest in the nation, but New York also faces higher operating and fuel costs.

New York hotels have benefited in recent years from the city’s international popularity and a deluge of foreign and domestic visitors, which topped a record 46 million last year, according to NYC & Company, the convention and visitors bureau. From 2003 to 2007, the number of international visitors grew by 83 percent.

Even when domestic tourism began to fall off this year, foreigners picked up the slack. In August, 5 percent fewer people arrived at New York-area airports from other American cities compared with a year earlier, but the decline was offset somewhat by a modest increase in foreign travelers, according to the Port Authority of New York and New Jersey.
But that now appears to be changing.

“Our hotels have experienced few cancellations,” said Michael J. Stengel, vice president of Marriott Hotels in New York City, which includes 21 hotels and about 7,000 rooms. “But as you look forward, demand is starting to soften for the fourth quarter. Even some of the international travel is starting to soften.”

Jonathan Tisch, chairman of Loews Hotels, which operates the 400-room Loews Regency on Park Avenue at 61st Street, is also worried about the future. “My sense is that we’ll be O.K. through the holidays,” Mr. Tisch said. “My real concern is what happens after the first of the year.”

Yet the number of hotels continues to increase. About a dozen hotels were expected to open this year, according to a report by NYC & Company. The report projects that 37 more, with more than 7,000 rooms, will open in 2009.

“There are a lot of potential hotels supposedly opening in 2009,” Mr. Stengel said, “but we think a lot of those will be delayed.”

The hotel trade association is also worried about talk in the City Council of raising the city’s hotel tax, already one of the highest in the country, at a time when New York faces a $2 billion budget gap. With the help of the Bloomberg administration, hotel operators blocked a similar proposal in June.

Lewis A. Fidler, a city councilman from Brooklyn who supports raising the tax, said a one-point increase would raise $70 million annually. “The idea of not reaching into the pocket of foreign tourists before reaching into the pocket of New Yorkers is offensive,” Mr. Fidler said.

But Joseph Spinnato, president of the hotel association, said, “We feel very strongly that any tax increase would be detrimental to the industry and the city.”

A report by Sean Hennessey of Lodging Investment Advisors, commissioned by the hotel association, argues that even a one-point increase in the city’s 14.54 percent hotel tax could cause a loss of more than $533 million in sales and 3,716 jobs.

In the early 1990s, the hotel industry waged a successful battle to cut the tax to less than 15 percent from 21.25 percent. In the years that followed, occupancy increased and the average room rate rose faster than inflation. But one hotel analyst suggested that it had more to do with a thriving economy and New York’s popularity than with a lower tax.

Copyright 2008 The New York Times Company

Hennessey Report August 2008

New York City has benefitted mightily from international tourism this summer, keeping hotels on a pace equal to or better than 2007. Despite a noticeable fall-off in business from Wall Street firms, other sources of business –particularly those map-toting tourists- have kept the New York hotel market on even an even keel. There does not appear to be any generalized weakness around town for the second half of the year, and many hotels note that their fall convention and year-end holiday business is already substantially on the books. Room rates are up and average of 7% to 8% year-to-date. While this is off the pace of the last few years, it is consistent with my forecast for 2008.

This month I want to spend some time discussing the pipeline of new hotels planned for New York. There are approximately 220 announced hotel projects planned for the New York City, as shown in the following table. This is on top an existing inventory of roundly 450 hotels. This means that if each of the proposed hotels were built, it would represent an increase of approximately 50% in the number of hotels. This seems hard to believe given that just a few years ago hotel closings were the order of the day.

Are we headed for a glut of rooms? A closer look at the numbers indicates that a substantial, but far less threatening increase is underway. The first step in analyzing the situation is to look at what is actually under construction and what is only in the planning stages. The following table sets for a more detailed look at the hotel supply pipeline for the Borough of Manhattan. This table shows the expected competitive positioning of the planned hotels as well as how far along in the development process they are. Each cell of the table shows the proposed number of rooms on the top line and the number of hotels in the second line. For example, there are 217 rooms presently under construction in 1 luxury hotel (the W underway in lower Manhattan). Where the second line also shows a secondary number in parentheses, this represents hotels for which the room count has not been finalized. For example, the table shows that there are 1,272 rooms currently in planning for 7 upscale hotels; there is also 1 upscale hotel in planning for which the room count is unknown.

There are currently 8,538 new rooms under construction in Manhattan, most of which will open later this year, in 2009, or in early 2010. This increase is on a base of roundly 66,000 rooms as of July 2008. This means that the most immediate new rooms will add 13% to the inventory of new rooms in Manhattan. Looking at the top 3 categories of luxury, upper upscale, and upscale hotels, there are 3,204 new rooms under construction. As of July 2008, there were 30,021 hotels existing in these three categories. This indicates an increase of slightly more than 10% is expected within the next few years. Luxury hotels will see a short term increase of 2.3% based on projects presently under construction, while the comparable figure for upscale hotels is 8.6%. Remember these are not annual rates of increase but one-time increases over a period of years.

The simple fact is that New York hoteliers have generally not had to worry about new competition, and the current cycle is going to upset that historical pattern for the next few years. It is clear that most of the competitive pressure will be felt at mid-priced hotels and those that have not maintained the physical quality and guest service standards that today’s travelers demand.

What about the rest of the hotels in various stages of planning? It is appropriate to monitor these projects and to consider preemptive strategies as the begin construction. The current credit crunch, along with other factors, suggests that not all of the proposed hotels will be built. Even those that are built generally take about two years to complete, giving existing hotels a long lead time to consider their competitive options.