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.