Can NYC’s aging hotel boom find new life?: Q&A, part I December 1, 2016

The Real Deal| 12/01/2016

Even as tourists and business travelers flock to New York City in growing numbers, hotel operators face two looming threats — the dollar’s strength and a wave of new industry capacity. With 16,461 rooms under construction, per industry tracker STR, room rates could soon come under pressure, and some projects could get shelved. But in the longer term, as the city’s population heads toward 9 million, the adage “if you build it, they will come” should hold true, said Jan Freitag, STR’s senior vice president of lodging insight. Meanwhile, the industry recently logged what some hail as an important victory in Albany over Airbnb. As per a law signed in October, people who advertise rentals for less than 30 days in multi-unit buildings could face fines of up to $7,500. Michael Barnello, chief executive of LaSalle Hotel Properties, told investors he sees the move as “a big [shot] in the arm for the hotel business, certainly in terms of the pricing.” Others are more dismissive of Airbnb. “It’s like a pimple on an elephant’s behind,” said Allen Gross chief executive of GFI Capital Resources Group, owners of hotels including the Ace in Chelsea and the Beekman downtown.

Allen Gross
Chairman and Chief Executive, GFI Capital Resources Group

Despite a full-court press by Airbnb, Gov. Andrew Cuomo signed a law in October that will impose stiff fines on those who advertise rentals for less than 30 days in multi-unit buildings. As a hotel developer, do you see this as a big boost for the operators?

No. Demand and seasonality is what affects pricing. The new law might help occupancy a little, but with so much product coming online, Airbnb is not the only driving force.
According to STR, New York City will see a 15 percent increase in the number of rooms if all hotel projects come to fruition. Are we at the tail end of a decade-long boom?
Two things are affecting the market, the strong dollar and supply. Europeans are wondering, should I go to America, the Caribbean or South America, or stay in Europe? They go where they can get the best bang for their buck. But on the other hand, many, many more people are coming to New York City compared to 10 years ago. I don’t think this is the end of the boom; it’s the beginning. On the other hand, I think some of the proposed hotels are never going to get built.

Through September, NYC hotel occupancy stood at 85.1 percent, up slightly from a year ago. Where do you think occupancy is heading in 2017?

Eighty-five is a big number. At the end of the day, it’s about how you manage your room rate. That’s the key to being successful. I would rather be 90 percent occupied at a higher rate than 100 percent occupied at a lower rate.

According to the state Comptroller, the number of hotels in Brooklyn has tripled since 2006, while in Queens it has doubled. What is behind these sharp rises?

In the outer boroughs, there weren’t enough hotels to begin with. It was ridiculous. They were so badly needed that they will be absorbed. We are building a hotel in Downtown Brooklyn, a borough where a lot of new stuff is happening all over. It’s like having four or five restaurants open near each other — it creates a neighborhood. That makes us happy.
Some NYC hotel developers are going micro with their room sizes in an effort to maximize profits.

Does this trend have legs?
Everyone is doing those micro youth hostels. People ask me, why don’t I do it? I’m worried about what happens when rates go down. If I’m charging $59 a day for a bed, how can I go lower? To $29? How do I make money? That model only works when rates are high.
Furniture retailers Restoration Hardware and West Elm are launching their own hotels and are giving guests the option of buying their room’s furnishings online. Meanwhile, gym operator Equinox Holdings will open its first hotel in 2019. What do you think about this convergence of sectors?
Maybe Tesla should do it too. I was asked by Equinox if I would I be interested, but it’s not something I wanted to do. It’s a gimmick. We have gyms in all our hotels, but it’s the quietest place in the hotel. I want my hotels to transcend time. If everyone is eating kale, I’m not going to serve only kale all the time. It’s a fad. Restoration Hardware, it’s nice, but maybe they should do a showroom in a hotel. But a chain? I don’t see it.

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