Summer season failing to heat up hotel market

Real Estate Weekly, July 14, 2004 by Elaine Misonzhnik

Despite an improving hospitality market, it seems New York's real estate investors see more opportunity in the residential sector.

According to several of the city's hospitality experts, the major transactions this year involved sales of boutique hotels to residential converters.

According to a report from Ernst & Young, Manhattan's hotel occupancy rate increased by 2.4 percentage points in the first quarter of 2004 and rate per room increased by 3.1%. A report from Raymond James & Associates predicted 20% earnings growth for the hospitality industry for the next few years. But with the interest rates starting to rise and crowds lining up to look at every new apartment, it seems the lure of a residential conversion is hard to resist. "That's the ironic thing--the market is in a real growth right now, but in the last four or five hotel transactions, the properties have been sold to residential converters," noted Tom McConnell, senior managing director of the hotel transactions group at Cushman & Wakefield.

"That would include the Empire Hotel, the Intercontinental, the Mayflower Hotel and the Windsor Hotel, as well as three or four others that might [also convert]. And newly built hotels--especially the five-star hotels--all have a residential component. So I guess you have a good hospitality market, but an even hotter residential market."

Alan Tantless, executive vice president of Jones Lang LaSalle Hotels, Inc., confirms that he has also heard rumors of looming residential conversions.

"A lot of New York hotels have recently left the market and there are rumors of others following," he said.

"The strength of the residential market created this opportunity. And the trend of creating properties that are part condo units and part hotel units seems to be very popular right now.

"Clearly, the hotel industry is recovering, but we're not at the point of 2000, which was the high water mark for the industry. People are looking for alternate uses for their hotels."

For those property owners that decide to stay in the hospitality sector, the emphasis is currently on service.

It seems that business travelers--who have remained the bread and butter of the industry throughout the recent recession--like to get a sense of being at home when they check in.

"Boutique hotels are very popular right now--small establishments and personal service is where the industry is going," said Brad Zackson, chairman of the Dynamic Group.

"The bigger hotels give more of a business feel and people who are often traveling on business don't want that."

Michael Logsdon, president and CEO of EMG, a company that provides commercial real estate information services, agrees that coziness seems to be a big consideration for today's operators.

"I think you will find that existing hotel operations are really focusing on comfort--they are proactively offering things like no-smoking areas and filtered water and air," he said.

"They try to make sure that there are nearby restaurants [where people can eat]. What people seem to want is a lot of amenities that offer a similar to at-home atmosphere."