Supply Side Factors Affecting NYC Hoteliers
1.8.20 | Berdon Industry Insights
During the first 9 months of 2019, hotels in New York City (the “City”) experienced declines in occupancy as well as average daily rate (ADR). Supply growth is one of the factors to blame for this situation. According to an estimate by STR, Inc., supply growth in the City is expected to outpace demand growth for 2020, leading to further declines in occupancy and ADR. A NYC Hotel Market Analysis, published by the NYC Department of City Planning, reveals that hotel inventory in the City increased from 74,000 rooms in 2007 to 116,000 rooms in 2017, with Manhattan hotel inventory increasing from 64,000 rooms to 95,000 rooms during the same period. In addition to supply growth, challenges posed by Airbnb and other home-sharing platforms have also negatively impacted hotel occupancy and ADR. However, it is expected that skyrocketing construction costs and challenges in getting new construction financing, combined with the recent regulatory developments (noted below), will help curb supply growth, going forward.
M1 Zoning Restrictions for Hotels – Historically, M1 districts, which typically include light industrial uses (woodworking shops, repair shops, storage facilities, etc.), but also permit offices, hotels and retail uses, are well suited for hotel construction for the following reasons:
- The higher permitted floor area ratio (FAR) in these districts
- The ability for hotels to be developed on relatively small, narrow lots
- The limited parking requirements
As a result, a boom in new hotel construction in M1 districts has taken place in the last decade, as shown below:
Percentage of hotel rooms in M1 districts
|Built 2008 - 2017||Total Pipeline as of June 2017|
Source: New York City Hotel Market Analysis and M1 Zone Impacts
In December 2018, the City adopted a zoning text amendment requiring a special permit for hotel development in M1 districts. The amendment reduced the land available for as-of-right hotel construction by 45% and requires a public review process, which can be time-consuming and expensive. Potentially, the permit may not be granted for new hotel development after the public review process. As a result, the amendment is expected to deter new hotel development in these districts.
Expiration of Local Law 50 – In June 2015, following the conversions at the Plaza Hotel and the Waldorf Astoria, which cut down hotel inventory and high-cost union jobs, the City enacted Local Law 50. The law prohibited hotels in Manhattan, with 150 rooms or more, from converting more than 20% of their rooms for a different use (e.g., a hotel-to-condo conversion). The law was supposed to expire in 2017, but was extended for another two years. With no further extension, the law expired in June 2019. As a result, hoteliers now have the option to convert their hotels for an alternate use. With the softness in the City’s luxury condo market, it is not clear if, and how, many hotels will take advantage of the Local Law 50 expiration. However, if they do take advantage of the expiration, a reduction in the amount of hotel inventory from the market is expected.
Agreement with Airbnb – The City and Airbnb have a history of legal battles. However, in May 2019, NYC and Airbnb reached an agreement, whereby Airbnb agreed to share partially redacted data on more than 17,000 listings between January 1, 2018 and February 18, 2019 with the Mayor’s Office of Special Enforcement (OSE). Upon review of the initial data, OSE can request more detailed deanonymized data on these listings if the initial data points to illegal activity. It is illegal in NYC to rent an apartment or home for less than 30 days without the owner being present in the unit. Therefore, this agreement is expected to fuel the City’s efforts to crack down on illegal short-term rentals which would benefit hoteliers by curtailing the amount of unregulated supply from the market.
To learn more about the potential impact of the City’s supply side factors affecting the hotel industry and the effects of the above described regulations, contact Smit Shah at 212.331.7493 or firstname.lastname@example.org, or your Berdon advisor.
Berdon LLP, New York Accountants and Advisors