Sheraton New York Small bites whet investor appetite in the Big AppleBy Oriana Lerner | January 12, 2023Share 2023 might offer an appealing menu of single-asset and small portfolio plays in NYC for cashed-up buyers. Expensive capital, new regulations and rising costs mean the best hotel investment opportunities in New York City this year look more like tapas than a big, fat New York pizza. They could make delicious nibbles for buyers who can afford a seat at the table.It’s unlikely New York will see a record-breaking hotel deal pace in 2023, and aside from the potential sale of the Aman New York (The Aman Group was reported to be exploring a sale in Q4 2022), it’s not likely to be a marquee year for trophy asset sales either. On top of that, spiraling capital, construction and labor costs compounded by regulatory changes make new construction exponentially more challenging.What is expected, however, is smart, cashed-up buyers chasing less flashy plays with strong ROI. “We are likely to see an uptick in individual asset and small portfolio transactions as hotel fundamentals rebound and buyers can see a path to improved profitability,” said Sean Hennessey, CEO of Lodging Advisors, Fort Monmouth, New Jersey, and clinical associate professor, NYU Tisch Center for Hospitality. “Rising interest rates suggest we won't see high water-mark prices, but there should be upward price pressure. Of course, several exogenous factors could upend this emerging trend, such as a deep economic recession, reemergence of COVID or other similar disruptors.”Sean HennesseyDeal pace likely will be bumped up by forced sales across the New York market as loans mature and current owners are unable to handle soaring capital costs and interest rates. “Base rates are high. SOFR was 0% in January 2022 and is now over 4% [at press time in mid-January 2023]. Debt financing dominates the market and isn’t cheap. That all means a lot of owners will have to sell,” said Joseph Delli Santi, chief investment officer, MCR Hotels, New York City, which acquired the 1,780-key Sheraton New York Times Square Hotel from Host Hotels & Resorts in April 2022 for $373 million, among other major Manhattan buys over the last 24 months.Hennessey added that the length of the New York market recovery already has begun to fuel exits for some owners.In addition to MCR's acquisition of the New York Sheraton from Host Hotels and Resorts, Denihan Hospitality Group sold four hotels (now known as The Benjamin Royal Sonesta New York, The Shelburne Sonesta New York, The Gardens Sonesta ES Suites New York and The Fifty Sonesta Select New York) to Sonesta, according to Hennessey.For investors wanting to break into or expand their portfolios in the city, Hennessey noted that owner-operators such as MCR and Highgate are part of a wave of new capital in a market traditionally dominated by real estate families.More assets may go to partners, lendersThe deals that do get done may look a little different. “There were several examples of owners ceding ownership of hotels to their financial partners, such as Watermark Capital’s transfer of the Holiday Inn 26th Street to Two Kings Real Estate,” Hennessey noted. The former Sister City hotel on the Bowery, facing foreclosure in 2022, saw Bank Hapoalim sell its $77 million loan on the property to an unknown lender rather than foreclose. The Crowne Plaza Times Square filed for bankruptcy at the end of Q4 2022.That trend will intensify in 2023 as mezzanine lenders take over hotels in which they are already invested, potentially keeping them off the market until what they deem to be a full recovery. “While most mezzanine lenders are not active hoteliers, they generally have the financial strength to survive until earnings fully rebound,” Hennessey said.2023 NYC recovery?Depending on the definition of full recovery, 2023 could be a year of impactful deals for some investors targeting New York City. “We’re already at 2019 RevPAR and see business travel – along with Chinese tourism that has been absent since the start of the pandemic – coming back in 2023,” Delli Santi said. He takes a very bullish stance on the city and believes much of the pre-pandemic supply boom was offset by subsequent closures, creating an attractive supply-demand picture. Joseph Delli SantiFor Hennessey, maintaining room rate growth in the face of new supply is the biggest challenge this year, along with a strong U.S. dollar and prospective rules around lodging economics [like pending legislation that would limit conversion of hotel rooms to residential use and another proposed but not yet pending bill on unionization], contributing to a somewhat tempered deal pace. Like Delli Santi, though, he feels the supply and demand fundamentals remain strong.“The market is not overbuilt in the traditional sense, in that occupancy remains strong,” Hennessey added. “New York City’s hotel occupancy has generally been over 80% for more than a decade. This suggests the market has historically been under-supplied. Those days may be ending but the stats don't show it yet.” Investors looking for a share of the Big Apple pie will have to gain a nuanced understanding of both local and global trends to capitalize on opportunities while dodging pitfalls.