After nearly two years of New York City hotel owners holding out hope for a tourism recovery, something has finally given in the market as more and more are cashing out.
A series of Manhattan hotel sales at prices well below pre-pandemic valuations — in some cases at a significant loss to the seller — have made headlines in recent weeks and raised questions about the future of New York’s hospitality industry.
In December, RLJ Lodging Trust sold the Midtown DoubleTree at 569 Lexington Ave. to Hawkins Way Capital for $146M, a sale price that was less than half of what RLJ Lodging paid for the property in 2010. Earlier this month later, a majority stake in the Columbus Circle Mandarin Oriental sold for $98M, a price significantly discounted from the building’s pre-pandemic valuations.
This week, The Empire Hotel on West 63rd Street, which has ground-floor retail space leased to a Walgreens and a Starbucks, had its valuation slashed to $137M, down from $393M in 2012, according to CMBS tracking firm Trepp. No payments on the loan have been made since February, according to the special servicer. The hotel is owned by The Chetrit Group.
As the omicron variant has kept tourists and business travelers out of the Big Apple and snuffed out any hopes of a winter bounce back for hotel operators, these underwhelming sale prices — and some owners’ apparent willingness to take big losses to exit the market — could be seen as the beginning of a wider sell-off that will see assets continue to shed value across the board.
But hotel industry insiders told Bisnow this week that the rash of recent transactions isn’t a fire sale, nor are real estate investors fleeing the city’s hotel capital markets. They show New York hotels are increasingly viewed as a key area of opportunity, with valuations artificially suppressed by external market forces and a rapid recovery just over the horizon.
“Is there discounted pricing on hotels relative to a pre- and post-pandemic environment? Absolutely. But is there blood in the water in New York City in the hospitality space, which is what everyone was expecting? That’s a clear no,” said Jeffrey Davis, a senior managing director in JLL’s Hotel’s and Hospitality Group. “We’re at a place where you’re going to quickly see capital chasing hotels in New York City, which is going to ultimately drive the pricing up pretty quickly.”
Beyond the eye-opening discounts owners have conceded on some hotel deals, others found a buyer who eyes a future for their property outside of the hospitality space.
The landmark Excelsior Hotel was sold for $80M earlier this month to a developer who plans to convert the Upper West Side property into housing. The Watson hotel in Midtown is being partially converted to condos as well, while The Hotel at New York City in Murray Hill, which had been closed for nearly two years, sold to a group including Slate Property Group, which intends to turn it into transitional housing for the homeless.
The Excelsior Hotel on Manhattan’s Upper West Side
It’s not exactly breaking news that the past two years have been painful for New York hotel operators and their landlords. Through months of uncertainty, Manhattan’s hospitality industry has endured record vacancies, marquee properties shuttering — some of which did so permanently — and a burgeoning recovery stamped out by the omicron variant, with tourists staying away even as residents flocked back to the city.
Indeed, a recent CBRE report projected that NYC hotels won’t see a full recovery until 2025, a later date than earlier projections, but a timeline that has gained broad acceptance. Hotels also had the highest CMBS default rate of any asset class, a gauge of distress that puts the sector above even retail.
“We’ve been involved with dozens of hotels in New York, and over the past year and a half since Covid, a lot of lenders have come to us for advice in terms of strategy for the hotels that they’ve either taken back or are considering taking back,” said Derek Olsen, managing director and senior vice president at hotel asset manager CHM Warnick. “And I think that everyone felt like New York — the U.S. as a whole, but New York in particular — was going to recover sooner than it has.”
While the multifamily and office capital markets began to swing back toward pre-pandemic normalcy in volume, 2021 saw just $1.2B in hotel assets traded in Manhattan, according to data provided by Colliers. New York hotels routinely saw that kind of deal in the average quarter between 2015 and 2017.
But in recent weeks, the frigidity of the market has thawed as the spread between what hotel owners are willing to sell for and what investors are willing to pay has closed — with the help of enthusiasm among opportunistic capital.
“With a blank check, I’d probably make some investments in the hospitality sector,” Meridian Capital Group Senior Managing Director Ronnie Levine said at a Bisnow event in December. “There’s the deepest discounts, you need patience and you’re taking obvious risk, but I think if you’re a believer in the rebound of New York, and you’ve already seen the multifamily sector snap back with some serious vengeance and the for-sale condo side, the numbers have been very strong.”
Underpinning this bullishness on hotel properties, investors tell Bisnow, is confidence that while it may be three years before New York Hotel operations return to normal, the recovery will be faster than in almost every competing market. Davis pointed to how quickly room rates rose when New York reopened prior to omicron, with major hotels seeing occupancy rates over 70% in the fourth quarter until the variant struck.
“It was hard to find a room in New York City from Wednesday to Sunday for less than $800 a night,” he said. “That’s a pretty damn good sign that we were on the road to recovery from a fundamentals perspective.”
Investors are eager to invest in New York hotels today, industry sources say, because of a number of market forces that have suppressed prices for hotel properties, independent of the health of the hospitality sector or building performance. There is a flood of new hotel inventory from construction that began before the pandemic, inundating the market as demand was at an all-time low.
Most significantly, the pandemic triggered a dramatic shift in what type of buyer pursued hotel deals. Prior to 2020, foreign capital and institutional investors accounted for a large share of the city’s hotel deals and drove prices skyward. The pandemic slowed cross-border investment significantly, while institutional investors increasingly allocated capital away from hotels toward industrial and multifamily.
Private sales jumped from just 20% of transactions in 2019 to around a third of sales last year, according to Colliers. This shifting mix of capital sources played a significant role in reducing per-room pricing across Manhattan from around $700K per room at the height of the cross-border capital influx in 2015 and 2016 to around $250K per room in 2021.
“The international money really was what drove the pricing in New York,” Olsen said. “Without that international money, I think that’s another reason why the prices have dropped and why you’re seeing some of these prices per room that you’re seeing right now.”
Hotels have long been considered a hedge against inflation, currently a significant concern, because room rates can be increased instantly. Rent on an office lease, by contrast, can be locked in for a decade. With labor and supply chain problems driving up construction costs, existing hotels offer lower replacement costs at present than new development.
For New York, the added draw is the unusual possibility of getting good value on a premium Manhattan property — as long as you’re OK waiting around for the payoff.
“There’s a lot of capital that’s just waiting to be deployed,” Olsen said. “I think this year and 2023 have been viewed as the years where if you want to get your capital out into this market, this is the time to do it. It just has to be patient capital.”