Papal Visit Drives Lodging Demand for Recovering New York City Market

This article is republished with permission from REITCafe.

With the United Nations General Assembly, Pope Francis, and President Obama converging on New York City, booking a hotel room there has become next to impossible. Room prices have spiked—at least temporarily—throughout much of the city. This anecdotal evidence is in line with hotel market fundamentals that are strong nationwide. Yet, it is at odds with a real estate investment trust (REIT) sector where total returns are down 16.41 percent year-to-date in 2015. Lodging has been one of the weakest REIT sectors so far in 2015, partially because investors expect a market correction after more than five years of upward momentum. In fact, during August, STR reported its first decrease in nationwide occupancy in many years, although average daily rate (ADR) and revenue per available room (RevPAR) continued to move upward. Worries about the New York City hotel market also have affected lodging REITs.

Despite the seemingly tight supply and demand conditions, REITs largely reported flat to negative performance for their New York City–area properties during the first half of this year. New York represents the largest piece of Host Hotels and Resorts’ (HST) portfolio, which owned eight properties in the New York area totaling 6,951 rooms at midyear 2015. Total revenues for the firm’s New York properties through the first half of 2015 were down 2.4 percent from 2014, with earnings before interest, tax, depreciation, and amortization (EBITDA) down 16.6 percent. RLJ Lodging Trust (RLJ) owns five New York City properties. Average occupancy for those hotels through the first half of 2015 was 94.2 percent, down from 95.3 percent one year earlier. In addition, RevPAR for these properties declined 5.7 percent during that period. Sunstone Hotel Investors (SHO) has two Manhattan properties that reported a decrease in RevPAR of 5.4 percent and 4.2 percent, respectively, for the first half of 2015.

New York City REIT property performance is consistent with the area’s broader lodging market. New York has reported some of the weakest performance for ADR and RevPAR among top lodging markets in 2015, according to data from STR. New York was affected by harsh winter weather early in the year, but the area has reported weak performance in ADR and RevPAR in the months following.

Two oft-cited reasons for the weak lodging REIT performance are the expectations that the strong U.S. dollar will affect international travel to the United States and that the addition of significant new supply in New York will affect pricing power. In reality, these factors will have a short-term impact. At the end of May, New York had 13,300 hotel rooms under construction, according to the STR Pipeline Report. NYC & Company reported in May that the area will gain 20,000 rooms during the next three years. New York’s pipeline is greater than that of any other market. Over the longer term, however, the market will absorb the new supply, and international travelers currently priced out of the market will create suppressed demand for the future.

The appeal of New York City is no secret, and though the market’s lodging sector is healthy, it is growing at a slower pace than in prior periods. The market might have to endure further rough patches before recovering. Investors are pricing a slowdown or downturn into their valuations, but REITs are not shying away from New York City investments because business and tourism travel will maintain the area as a marquee lodging destination over the long term.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.

** - 10 yr. Treasury Yield as of 09/25/2015.