With about 2,000 rooms estimated to fall out of the NYC pipeline over the next five years, existing asset deals will dominate the NYC hotel investment landscape in 2023.
“If you build it, they will come” worked well enough as a maxim for the Big Apple’s pre-pandemic hotel sector, which added over 20,000 rooms in active inventory between 2014 and 2019 while, according to industry thought leader Sean Hennessey, maintaining over 80% occupancy for the past decade.
In 2023, the question will look more like, “Can you build it, and can you afford to wait until they come?” The current pipeline is more than robust, with over 80 new hotels totaling more than 12,000 rooms already announced, according to Hennessey, CEO of Lodging Advisors, Port Monmouth, New Jersey, and clinical associate professor, NYU Tisch Center for Hospitality. Don’t wait for the ribbon cutting, he cautions, estimating about 2,000 rooms will fall out of the pipeline over the next five years. That picture looks positively rosy compared to the number of new planned hotels he expects will be added in 2023. Hennessey partially attributes their absence to national and global factors such as escalating land, construction, labor and capital costs though, he added, some of that may be mitigated if the economy enters a recession and demand ebbs. Then, there’s still the issue of sub-prior-peak profitability.
Local market factors may pose an even larger obstacle for developers trying to make new construction pencil out. The need for special permits, enacted in 2021, layers in additional time and cost as well as opens up the possibility of the project getting nixed before construction starts, according to both Hennessey and Joseph Delli Santi, chief investment officer, MCR Hotels, New York City.
In a failed lawsuit, opponents charged that the special permits would give unions a means to “exert political pressure to either block new limited-use hotels or require all new hotels to utilize a union workforce” during the city’s extensive Uniform Land Use Review process. Delli Santi noted that non-union projects were a substantial part of the pre-pandemic building boom.
Even with that hurdle cleared, investors need to be cashed up enough to withstand an additional 12 to 24 months’ ramp-up. “The traditional consensus was that New York City hotels would take less than two years to achieve stabilized RevPAR. This has expanded to three to four years under current underwriting standards,” Hennessey said. “I expect it will take several years for most new full-service, unionized hotels to display strong development promise.” Delli Santi doesn’t see such a black and white picture and would consider a newbuild in 2023 if it made sense as a real estate play. Sharing his deal radar are adaptive reuse and gut renovation projects.
Looking at the market overall, Hennessey doesn’t expect a flood of off-the-beaten-path deals. “As with many assets, hotel investors exhibit a flight to quality during hard times,” he said. “Where five years ago almost any neighborhood throughout New York City seemed suitable for hotel development and investment, the emphasis has returned to Manhattan and exceptional locations in the outer boroughs. I expect this to continue in 2023 and beyond.”
In his view, existing, non-union, select-service properties are the most attractive investment properties, with most transactions tracking under $80 million (which he admits is only “smaller” in a local context).
Delli Santi is sector- and size-agnostic, though it’s worth noting MCR’s last acquisitions in New York City were 4-star assets in Manhattan. The recent sale of the bankrupt Williamsburg Hotel to Quadrum Global and foreclosures facing well-known lifestyle properties such as Row NYC suggests that there may be more distressed assets in that market niche on the market in 2023.
Whatever projects developers and investors take on this year, equity for the long haul will be a must. Whether the economy dips into a recession in 2023 or not, expensive capital and regulatory logjams require pockets deep enough to weather whatever comes.