Building a hotel in New York City is becoming more affordable than buying one, as demand from investors helps drive a surge in property prices. Fifty new hotels are set to open by the end of 2013, with sixty-eight more scheduled for completion by 2014. According to hotel-consulting firm Lodging Econometrics, Manhattan lodging properties sold for an average of $505,157 a room.
Increased competition for purchases has led developers to plan the opening of about 50 new hotels through 2013 in New York, more than triple the number in Washington, D.C., the next-busiest U.S. city for construction, according to hotel-consulting firm Lodging Econometrics. Sixty-eight more are set for completion in 2014.
Hotel developers, many of whom stopped building in Manhattan and other New York boroughs when financing dried up during the recession, are returning following a gain in commercial-property prices, which are at their highest since a record reached in 2006.
“Right now, it is cheaper to build than to buy in New York,” said Bruce Ford, senior vice president of sales at Lodging Econometrics. “Most developers would argue that nationwide, it's better to open a hotel in 2013 than in 2012, but in New York City, a market that leads the cycle, next year bill excellent.”
Manhattan lodging properties sold for an average of $505,157 a room this year through Sept. 30, up from $344,799 for all of last year and $413,644 in 2009, according to research firm Real Capital Analytics Inc. At the 2006 peak, the average was $632,894. Meanwhile, companies including DiamondRock Hospitality Co. and Hidrock Realty Inc. are building hotels for $300,000 to $450,000 per room.
Hotel construction in New York City includes the gutting and redevelopment of office buildings, as well as the demolition of existing structures to make way for ground-up buildings.
Ian Schrager, a pioneer of the boutique hotel concept, said earlier this month that his company agreed to buy a development site in New York City and was close to completing a second Manhattan deal as part of a plan to develop trendy, less-expensive properties in “gateway” cities. He declined to give details of the plots or say how much he's paying for them.
“As long as a new build is around $400,000 to $500,000 a key, you can build all day long in New York because it's in line or below what you would pay for an existing building,” Mr. Schrager said earlier this month.
Real estate investment trusts have been contributing to the increase in prices for existing hotels, making $1.14 billion in lodging purchases in Manhattan this year through Sept. 30, according to Real Capital. That accounted for 38% of the total traded in the city.
Fourteen New York hotels sold from May through August, all of which went for more than $400,000 a room. They include the Radisson Lexington Hotel, the Four Points by Sheraton Midtown-Times Square, Affinia Gardens and the Yotel, which features small “sleeping cabins,” PricewaterhouseCoopers said.
Among the costliest transactions was Morgans Hotel Group's sale of the Royalton New York to Irving, Texas-based Felcor Lodging Trust Inc. for $84.6 million, or $500,447 a room. Affinia Manhattan sold for $560,685 a room, while Affinia Gardens, which has residential-style suites, traded for $910,866 a room, according to the PricewaterhouseCoopers study.
The price surge has helped spur development. In New York's five boroughs, which have the most hotel rooms in the pipeline after Shanghai and Dubai, there were 25 hotel openings in 2008, 27 in 2009 and 34 in 2010. This year, 22 are coming on line, followed by an expected 23 in 2012, nine in 2013 and 68 in 2014 and beyond, according to Lodging Econometrics.
“Manhattan is an under-supplied market because it's a seven-day market,” said David Loeb, a hotel analyst at Robert W. Baird & Co. In one week in early October, New York hotels were 91.7% occupied. “Very few other markets even come close to that,” Mr. Loeb said.
Earlier this year, Bethesda, Md.-based DiamondRock agreed to buy a hotel being developed in Manhattan's Times Square area by a joint venture of Walton Street Capital and Highgate Holdings. The price will be between $112.5 million and $135 million, or about $450,000 a room, DiamondRock said in January. The cost of the property, scheduled to open in 2013, will depend on its ultimate number of guest rooms.
Starwood Capital Group, the buyout firm founded by Barry Sternlicht, agreed in March to take over a development contract from Orient-Express Hotels Ltd. for the New York Public Library's Donnell branch on West 53rd Street, in a partnership with Tribeca Associates. The buyers plan to spend $400 million on the site, which includes condominiums, hotel rooms and a library.
Crain's New York Business
October 24, 2011
