Supply Glut, Airbnb And Economic Upsets All Spell Tough Times Ahead For NYC Hotels

It’s a tough time for New York’s hospitality industry, but there are still opportunities out there if you know where to look. To get the latest on the challenges faced by the city's hospitality sector, Bisnow talked with several panelists who'll be speaking at our upcoming 6th Annual Hotel and Investment Forum on April 21. 

With the city’s total key count growing by over 30,000 since 2007, to a total of over 100,000—reflecting a level of construction in the hospitality sector not seen since the '20s or '30s—rates have understandably struggled to keep up.

“It’s been difficult,” says Dream Hotel Group CEO Jay Stein. “I’ve been [working in the New York hospitality business] since the '80s, and this is by far the longest stretch of soft growth I’ve ever seen.”

Jay says Dream Hotel Group's year-over-year revenues in NYC have averaged between 2% and 4% since 2010, and that “this year may be no better, and perhaps even softer, the way things are shaping up.”

While Jay says Dream’s occupancy levels haven’t dropped during that period, room rates haven’t risen as much as they normally would have.

That’s due chiefly to the city-wide supply glut, but also because of increased competition from Airbnb and similar companies, and several economic factors. The strong dollar has also impacted tourism to New York, as have the economic collapses of Russia and Brazil and China’s recent softening.

Airbnb is the more pressing threat to NYC’s hospitality industry, Jay says.

While he acknowledges some studies show the online rental behemoth has had a negligible impact on the hospitality sector, he finds that hard to square with his gut instinct on how the NYC hotel market works.

“It seems obvious to me that if they book X rooms in X amount of time, those are almost allrooms that would’ve [been booked at hotels] instead," Jay says, "and that would’ve driven occupancy or room rates up.”

“The exact impact is hard to say, but to suggest it’s had no impact seems ludicrous to me,” he says.

LW Hospitality Advisors CEO Dan Lesser (above, with Arent Fox's Kimberly Wachen) notes that while some studies show little-to-no impact from Airbnb on the hospitality sector, others show quite the opposite.

He points to a recent report by HVS Consulting and Valuation that concludes Airbnb caused a direct loss of roughly $450M to NYC’s hotels last year alone. Granted, that study was commissioned by the Hotel Association of New York City, but Dan also cites others that seem to bear out Jay’s hunch.

A recent CBRE study also concluded that New York is “the market most at risk in the country to competition from Airbnb.” Still, he says, the reality is hard to pin down.

“The conflicting conclusions and opinions do not surprise me, because the reality is Airbnb has yet to release full booking and financial records,” Dan says.

Like Jay, Dan thinks Airbnb and other hospitality disruptors, as well as websites like Expedia, are having a major impact on the hospitality industry, and not just on its bottom line.

He cites growing competition from online competitors as a major reason we’ve seen so much high-profile M&A activity in the hospitality sector recently, from the much-discussed Starwood deal to Accor SA’s purchase of FRHI Holdings, to Hilton’s plans to spin off its real estate assets into a REIT.

“Hotel operating and real estate companies are bulking up to defend themselves,” he says.

While the rise of Airbnb, global economic turmoil and New York’s supply glut will likely continue to depress revenue growth in the NYC hotel market for the near future, some nonetheless see a bright future on the horizon for the city’s hospitality industry.

Ashish Lall (above), a director with Fortuna Realty Group, says oversupply in NYC has definitely given lenders pause when considering whether or not to finance new hotels in NYC—but that’s exactly how he likes it.

“We like that situation, because it allows us to capitalize on deals that otherwise might’ve been hard to find,” Ashish says.

While he admits the recent supply glut has pushed rate growth down some, along with economic impacts like the strong dollar, he sees those as temporary conditions.

“We take a long-term view on NYC, and we believe we’re well-positioned to weather the storm, if there even is one,” he says.

Ashish says he expects demand to catch up with supply before too long, at which point NYC hotels will be well-positioned for strong revenue growth. However, he says hotels will need to get a bit more creative to lock in occupants going forward.

“In the past, all you really had to do was open up your various sales channels,” Ashish says. “Now you really have to be much more proactive, targeting specific groups that are a good fit for your hotels, utilizing branding, advertising, social media and your sales personnel.”

Dan says hotels should also look to shore up their bottom line, by adopting a fee-based approach, as airlines, cruise ships and rental car businesses have done in recent years.

“Opportunities exist at many hotels to charge fees for: early check-in, WiFi, self-parking, checked luggage,” and other areas, he says. “Similar to their airline brethren, lodging owners and operators need to be more concerned with economic yields as compared with service and guest satisfaction.”

To learn more about what's happening in NYC's hospitality sector, check out Bisnow's upcoming 6th Annual Hotel and Investment Forum on April 21. Register here.