The Marriage of Lodging & Living in NYC
Today's Wall Street Journal carries an article called Living Life Like Eloise: More Hotels Add Condos:
The trend isn't limited to luxury hotels, although luxury hotels make up the lion's share of the market. According to Lodging Econometrics, 17% of all hotel rooms in development in the U.S. are part of a residential mixed-use project, many of which include so-called condo hotels, not pure residences.It just so happens that I am currently updating my database on the New York Lodging Market. So the article carried a certain resonance for me. I want to break it down because there is a marriage of lodging and condominiums at the high-end of the New York market that is emerging. (By the way if the luxury market in New York isn't your thing, you can skip this and read other news highlights on the web like the giant squid eating all the fish in California).Most residential units for sale in luxury hotels are intended for the exclusive use of the owner, who pays an annual maintenance and services fee. With condo hotels, though, developers sell hotel rooms to individuals who typically can stay in the units as many as 90 days a year. The rest of the time, the unit is rented out nightly like a regular hotel room, with the hotel management and the room owner splitting the revenue. Hoteliers sell timeshares or vacation clubs as well.
The WSJ article is not just about the trend towards residential living with "hotel amenities", something we New Yorkers have been hearing a lot about lately. Its about how the increased cost of land, construction and service worker wages needed to supply the luxury digs and over the top amenities in 5 Star Hotels is requiring the sale of condos to subsidize development. So despite the hot lodging market in the US (its sizzling in New York) developers need to get some cash out up-front by selling condos. In fact Lodging Econometrics is cited in the article as estimating that 95% of luxury resorts in the U.S. are being built as part of bigger overall projects, vs.10% in the 90s, and essentially functioning as amenities. Gardner-Johnson a real estate advisory firm is quoted as saying that, "The Four Seasons gets a 90% premium for its condos over comparable apartments". Well in this trend New York as in most other trends is on steroids. Check this NY Mag article on the most expensive apartments ever sold in New York....many hotel related:
But getting premium prices versus normal condos isn't the only benefit cagey developers have gotten in New York. One infamous developer reportedly gamed the system with his downtown condotel. It is supposedly located on land zoned strictly for commercial activity (like hotels), but they are selling condo-tels; bam, instant residential real estate. Some very sharp apprentice must have figured that one out. Some of these sharpies are taking it to the next level with condo-tel time shares. They can convert hotel space to residential space and then sell it multiple times to tragically rich foreigners who have so much money their math skills have become impaired. They pay a quarter of the full retail price of a condo for 8 weeks a year of use or something.
Now hold on kids because we are going to come full circle. As noted above, the hotel market in New York is sizzling and one of the reasons is that after 9/11 not only was their a dearth (SAT bonus point word) of hotel investment, but several hotels converted to condos including 995 Fifth Ave, The Plaza, The Mayflower, and a portion of the rooms at the St. Regis and The Essex House. In fact hotel supply declined in 2004 for the first time in 10 years due to this trend....and of course right into a booming market.
So lets hit "the numbahs". The Manhattan lodging market is one of the hottest in the nation and has been for 20 years. According to PKF Consulting New York City Lodging Rates averaged $271.08 per night in 2006 up 11.6% year-to-year. Room utilization was a near capacity 85.5% (anyone try to get a room in NYC lately?) and the highest since 1987. The US stats by comparison 63.4% occupancy, an average room rate of $97.61 was up 7.6% year-to-year. Forecasts are for more of the same with PricewaterhouseCoopers predicting a 12.6% rise in room rates and a tiny decline in occupancy due to new supply. So far this year the numbers are tracking towards their estimates. Now being involved in a lodging project we have done some work on what as been driving this phenomenon on the demand side, as well as the supply side discussed above. We looked at a lot of variables and the most important factor in driving New York hotel occupancy that we could find....drum roll please. Foreign visitation. We found an R squared (fancy statistical term for correlation) of 78.6%, the highest of many factors we looked at. We are joined in this observation by some smart guys at Hotel Investment Strategies, LLC a lodging investment advisory firm in New York who said in a report earlier this year that "Any diminution of demand by price-sensitive domestic visitors has been more than offset by demand from foreign visitors. They appear to be immune to the price of Manhattan's lodging because of favorable exchange rates". Importantly, the dollar keeps falling versus the Euro, Pound and Looney (Canada and Europe are the biggest generators of tourism to New York) and tourism continues to boom, with growth of 4% in 2006 predicted by NYC Visit.
The ultra hot New York lodging market has predictably caused a gusher of supply with 3,000 or so hotel rooms expected to be added in 2007, 5,300 in 2008 and 2,000 or so in 2009. Notably, some of these rooms will be condo-tel rooms by plan. Others may become condo-tels due to tightening economics for hotel building, still other entire structures may become condos (if zoned for it) in mid construction if the hotel market cools. Importantly, just as the weak dollar and foreign visitation is driving the lodging and condo-tel markets, its driving the New York condo market both directly and due to the fungibility of supply outlined here. The weak dollar is good up to a point....but that's the subject for a future post.
