| Effect of 9/11 on Hotel Industry
The World Trade Center tragedy resulted in the destruction or damage
of four downtown hotels�the Marriott World Trade Center, Marriott World
Financial Center, Millennium Hilton, and Embassy Suites Hotel New York
City. These hotel closings resulted in an instantaneous 3.8% decrease in
Manhattan�s overall room supply. The Marriott World Trade Center was completely
destroyed and plans to rebuild the property have not been announced. Although
reported to be structurally sound, the Millennium Hilton remains closed
and its reopening date is contingent upon the on going cleanup efforts
at Ground Zero. The Marriott Financial Center reopened its 504 rooms in
early January 2002. The new Ritz-Carlton Battery Park City, which postponed
its October 2001 debut, is also slated to open by the end of January 2002.
The Embassy Suites Hotel New York City is scheduled to resume operations
in 2002.
In Midtown, however, hotel opening dates have remained relatively unaffected
by the events of September 11. The W Times Square had already experienced
construction delays throughout the year, but opened on December 27th, 2001,
just in time to ring in the New Year. Serving as the flagship property
for the W chain, the opening of the 509-room property also marks the first
major hotel opening since September 11. Other notable upcoming hotels openings
in Midtown Manhattan in 2002 include the Westin New York at Times Square
and the Ritz-Carlton Central Park South.
The attacks on the World Trade Center in Lower Manhattan marked a turning
point for the nation�s highest performing lodging market. Due to declining
economic conditions and the attacks of September 11, RevPAR for Manhattan
decreased at a record breaking pace in fourth quarter 2001, primarily due
to relatively low occupancy levels. Occupancy for Manhattan fell to 62.2%
and 70.8% for September and October 2001, respectively, in comparison to
levels of 89% and 87% during the corresponding months in 2000.
According to a study commissioned by NYC & Company, New York City�s
convention and visitors bureau, RevPAR losses after September 11 were estimated
to total approximately $400 million in hotel revenue for fourth quarter
2001 alone. Historically, room revenue earned in the last third of the
year represents approximately 40% of Manhattan hotels� annual room revenue,
further reinforcing the significance of the last four months of 2001. The
study estimated that the City�s travel and tourism-related sectors will
lose between $7 and $13 billion in total revenue, or between 6.8% and 11.7%
of the $102 billion in tourism spending that was originally projected for
2001 through 2003.
After September 11, the Manhattan market continued to experience sharp
fluctuations in occupancy, ADR, and RevPAR in response to current events.
Despite the decreased tourism and heavy discounting after September 11,
lodging performance indicators did trend upwards during the fourth quarter,
allowing Manhattan to retain its position as the nation�s top performing
lodging market in terms of ADR and RevPAR.
Impact on Demand Generators
Office Space
Approximately 20% of the Downtown Manhattan office market�15.5 million
square feet of space�was directly destroyed as a result of the September
11 attack. Another 12 million square feet of office space was damaged in
the aftermath of the attack due to falling debris, building collapses and
fires. Of the space that was destroyed or damaged, more than 96%, or approximately
26.5 million square feet, had been leased at the time of the attack.
An estimated 81,000 workers had been displaced as a result of the loss
or damage of the nearly 30 million square feet of office space in Lower
Manhattan. The largest companies displaced from Lower Manhattan included
Merrill Lynch (3.1 million SF), Lehman Brothers (1.4 million SF), Morgan
Stanley Dean Witter (1.4 million SF), Solomon Smith Barney (1.4 million
SF), American Express (1.2 million SF), and Bank of New York (800,000 SF).
Although Manhattan contained approximately 25.8 million square feet of
vacant office space at the time of the attack, tenants primarily requiring
large contiguous space relocated to areas outside of Manhattan. Since the
attacks, the Hoboken/Jersey City waterfront has garnered the most interest
for office space outside of Manhattan.
In response to the events of September 11, several Midtown hotels, such
as the Sheraton Manhattan Hotel and the Marriott Marquis in Times Square,
converted all or a portion of its guestrooms into offices for Lehman Brothers
and Deloitte & Touche, respectively. These two conversions alone shrunk
the Manhattan rooms supply by approximately 850 rooms, although they only
represent temporary reductions in rooms supply and the tenants at both
hotels are anticipated to move out in 2002.
By the end of 2001 an estimated 6,000 employees of Merrill Lynch had
moved back to the World Financial Center. American Express and Dow Jones
& Co. also announced that they would begin their return to the World
Financial Center by April 2002. Lehman Brothers, however, will not return
to its Downtown offices as the company will establish its new headquarters
at the recently completed Morgan Stanley tower in Times Square.
Visitation/Air Travel
New York City�s three airports�La Guardia, JFK, and Newark-were completely
shut down from inbound and outbound flights for three days following the
attacks. Since their reopening, major airlines have reduced flights by
as much as 20% nationwide, with New York City experiencing an even larger
reduction of flights. As such, the Port Authority of New York and New Jersey
estimated that passenger traffic at all three airports would decrease by
17.4 million passengers in 2001.
Redevelopment of Downtown�Agencies, Programs & Initiatives
The timing and scope of the redevelopment plans for Lower Manhattan,
particularly the World Trade Center site, were still undetermined at the
close of 2001. Yet, it was widely recognized that the success of Lower
Manhattan was dependent upon the pace of the cleanup efforts and overall
support from the private sector to re-establish Downtown as the world�s
premier financial center.
The two major groups charged with redeveloping Lower Manhattan are the
Downtown Alliance and the newly created Lower Manhattan Redevelopment Corp.
Initiatives undertaken by the Downtown Alliance since September 11 include:
a grant and loan program for retailers, subsidized advertising for local
businesses, and support of tax credit legislation for both businesses and
residents near the World Trade Center site. The Lower Manhattan Redevelopment
Corp., created under Giuliani�s administration, is headed by John Whitehead,
former Co-chairman of Goldman, Sachs & Co. The organization�s primary
purpose is to determine a response to Lower Manhattan�s economic and infrastructure
needs and, more specifically, to develop plans for the World Trade Center
site.
Aid from the Public and Private Sectors
To encourage the return of tourists and business travelers to the Big
Apple, the public and private sectors launched numerous tourism promotion
campaigns. Among NYC & Company�s Fall 2001 promotions was �Paint the
town Red, White, and Blue,� where visitors received a variety of retail
discounts with proceeds being donated to the Twin Towers Fund. NYC &
Company has also undertaken a $12 million advertising campaign, where celebrities
such as Cindy Crawford and Regis Philbin proclaim their devotion to New
York City. This ad campaign also included the heavily aired �I Love New
York� commercial featuring former Mayor Rudolph Giuliani and Governor George
Pataki.
The most publicized support form the private sector came from Delta
Airlines, which launched its �Delta Loves NYC� campaign where the airline
is giving away more than 10,000 air tickets for travel to New York City.
Other symbolic gestures from companies and organizations included relocation
of meetings and conventions from other cities to Manhattan. Organizations
showing this form of support included the American Society of Travel Agents;
American Federation of State, County, and Municipal Employees; Audio Engineering
Society; and Microsoft.
Current Development Activity
in Manhattan
New Headquarters in Midtown
In 2001, office development remained strong in Manhattan with new projects
primarily located in Midtown and, more specifically, Times Square. New
office towers that opened in 2001 included the Reuters headquarters (3
Times Square), an 855,655-square foot-office building at the northeast
corner of 42nd Street and Seventh Avenue, and Morgan Stanley�s 1.6-million-square-foot
office building (recently sold to Lehman Brothers) on Seventh Avenue between
49th and 50th Streets. Other office projects under construction include
Ernst & Young�s headquarters at 5 Times Square (opening in April 2002)
and Arthur Andersen�s headquarters on 42nd Street and Seventh Avenue (opening
in early 2004). Each office tower will feature approximately 1.2 million
square feet. Additionally, the recent announcement of the 2003 groundbreaking
date for the New York Times building (1.5 million square feet), located
opposite the Port Authority Bus Terminal, signifies the continued transformation
of Times Square over the next several years.
Mixed-use Momentum
In recent years, Times Square has been the focus of mixed-use development
with the construction of Forest City Ratner�s retail and hotel development,
comprised of the 444-room Hilton Hotel, 25-screen AMC Empire movie theater,
and Madame Tussaud�s Wax Museum. Across the street, Tishman�s E-Walk complex
will increase activity to the area with the 863-room Westin, which is anticipated
to open in November 2002.
Mixed-use projects are gaining momentum outside of Times Square as the
Related Companies continue construction at 10 Columbus Circle (59th Street
and Central Park South). This project will contain a total of 1.65 million
square feet for its office, hotel, retail and residential uses, including
the AOL Time Warner headquarters and Mandarin Oriental Hotel. The Columbus
Circle project is estimated to open in 2004.
Millennium Partners and Ritz-Carlton have also played a significant
role in defining the mixed-use concept for Manhattan with its two hotel
/ condominium projects � Ritz-Carlton Battery Park City and Ritz-Carlton
Central Park South. Both projects are anticipated to open in 2002.
Most recently, the Trump Organization entered a contract to purchase
the Hotel Delmonico on Park Avenue and 59th Street for $115 million. Trump
is considering plans to convert the property into a mixed-use development,
consisting of luxury condominiums, hotel rooms, and retail space.
Planes, Trains and No Automobiles
On October 21, the AirTrain Newark opened. This new station links the
existing airport monorail system with more than 150 Amtrak and New Jersey
Transit trains. Advertising a 20-minute ride from Manhattan�s Penn Station,
the service exceeded ridership projections during its first month of operations.
Additionally, a $1.5 billion AirTrain project is underway at JFK Airport.
The new system will link many of JFK�s terminal buildings to the Metropolitan
Transit Authority (MTA) subway lines and the Long Island Rail Road (LIRR)
at stations in Jamaica and Howard Beach. The AirTrain at JFK is expected
to alleviate traffic congestion in and around JFK Airport and be fully
completed in 2003.
Our Top 10
Thoughts for 2002 and Beyond
1. New York Rising
Our year-end 2001 RevPAR estimate of $145 for Manhattan is similar to
the market�s performance in 1997 on a RevPAR basis. Manhattan has experienced
its lowest occupancy level since the early 1990s, yet historical trends
and macroeconomic forecasts suggest occupancy will remain stable in 2002.
ADR in 2002 is anticipated to remain constant due to continued room rate
discounts anticipated for the early part of the year. However, beginning
in 2003, occupancy and ADR are anticipated to increase as New York continues
to re-establish itself as the world�s financial and tourism capital.
2. Survival of the Segments
YTD November 2001 RevPAR statistics for the luxury, upscale, and midscale
segments indicate levels similar to those achieved in 1996 and 1997. RevPAR
for the luxury segment dropped at the fastest rate while RevPAR for the
upscale and midscale segments were affected relatively equally through
YTD November 2001. With more than 200 hotels competing for room demand
on the island of Manhattan, each segment will keep a close eye on their
competition when implementing their yield strategies in 2002.
3. Show Me the Money
Despite the Federal Reserve�s recent efforts to inject liquidity into
the capital markets, the hospitality industry is unlikely to follow suit.
Accordingly, several projects in the planning stages for the near term
may not come to fruition. For existing owners, the desire to refinance
at lower interest rates may be hampered by the limited number of willing
lenders and more onerous conditions. Long-term implications are likely
to include lower LTV�s, higher coverage ratios, more expensive mezzanine
financing, and rewards for strong brand affiliation.
4. Caveat Emptor
Despite the few hotel sales transactions in Manhattan for 2001, there
was a flurry of buyers eyeing opportunities to acquire depressed hotel
assets in the wake of September 11 local economy. With the economic downturn
continuing into early 2002, the risk for loan defaults still exists and
hotel investors will be anxious to acquire hotels at the low end of Manhattan�s
lodging cycle to capitalize on the upside potential over the next several
years.
5. Bridge and Tunnel Scene
The booming �90s, coupled with the saturation of Midtown Manhattan,
resulted in hotel development across the bridges and through the tunnels,
into neighborhoods such as Brooklyn, Queens, and Jersey City.
The strength of the Manhattan lodging market caused room demand to spill
over into these non-traditional hotel markets, where availability of land,
public investment, lower development costs and the existence of some base
demand helped to facilitate development opportunities.
However, the success of these neighboring markets is very much tied
to Manhattan�s lodging market performance and hotel developers may need
to reassess their outlook on prospective projects in these outlying locations.
6. The New Face of Lower Manhattan
Plans for the World Trade Center site are under active discussion.
The pace of Lower Manhattan�s commercial redevelopment will be dictated
largely by market demand and it is anticipated that new buildings will
not be built �on spec.� Such rebuilding efforts, stemming from the public
and private sectors� overall commitment to restore activity in Downtown,
will also dictate the pace of future hotel development in Lower Manhattan.
7. bloomberg.com
Mike Bloomberg made his own headlines when he was sworn in as the new
mayor of New York City in January. It is expected that Bloomberg will fill
these big shoes with guidance from former mayor Rudolph Giuliani, who is
anticipated continue lending his valuable leadership and expertise to the
City. As the City is anticipated to receive approximately $12 billion in
federal aid for its redevelopment efforts, leadership at the local level
will be instrumental to the appropriation of these funds and the speed
of Manhattan�s recovery.
8. The Bottom Line
In the wake of a more challenging marketplace, hotel operators and owners
have attempted a number of effective cost-cutting measures to offset increases
in insurance and other operating expenses. Alternative tactics include
financial restructuring, outsourcing, shared services, facility redeployment,
tax minimization, rationalization of human resources and incentive programs,
and improved information technology efficiencies.
9. Meeting Adjourned?
In today�s challenging economic environment and cost-containment mindset
(compounded by increased security issues), aligning travel/communication
and strategic business needs has become even more critical to profitable
operations for Corporate America. Market responses may include changes
to corporate travel policies, such as using a single corporate travel planner,
long-term leasing of hotel rooms and ancillary facilities, renegotiation
of existing hotel contracts, as well as a more structured use of modern,
on-site technologies for meetings, training programs, and other corporate
activities as a means to limit unnecessary off-site travel.
10. Go West
The City has revealed extensive redevelopment plans for an underutilized
section of Manhattan. Far West Midtown, designated as the area west of
9th Avenue between 28th and 42nd Streets, has been highly recognized among
legislators for its proximity to Midtown, small population base, and abundance
of underdeveloped land. Major projects included in the City�s plan include
the expansion of the Javits Center, a western extension of the Number 7
subway line from Times Square, and the possible development of a new stadium
that would serve as the future home of the New York Jets. The spotlight
will shine brighter on Far West Midtown for commercial development and
public infrastructure improvements if New York City is selected to host
the 2012 Summer Olympics. Serving as a catalyst to stimulate development
in Far West Midtown, the Olympic Games would also provide Manhattan an
opportunity to showcase the culmination of its decade of rebuilding efforts
after September 11, 2001.
---
© 2002 Ernst & Young
All Rights Reserved.
The Ernst & Young 2002 Manhattan Lodging Forecast contains an analysis
of data compiled from many sources, with credits identified. The contents
of this report is for reference only, not to be used as business advertisement
or to set standards on policies or actions. |
