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Manhattan Lodging Market:
Why ADR Growth is Lagging Behind the U.S. Average


by Jonathan Jaeger
March 2013

The U.S Lodging Industry posted strong increases in all major performance indices during 2012.  Most hotels across the country experienced rising revenues and profits, some even surpassing levels achieved prior to the 2008/2009 recession.  New York City, specifically the Manhattan Lodging Market, is regarded as one of the top markets in the country and one that attracts exceptionally strong investor interest.  If this is the case, then why is ADR growth lagging behind the U.S. average?

The following chart compares the national average rate to the ADR of hotels in Manhattan.  Consumer price index (CPI) data between 2007 and 2012 for the New York MSA and the entire U.S. is also presented.



According to Smith Travel Research, ADR increased approximately 5.0 percent in 2012 throughout the United States compared to only 2.0 percent in Manhattan.  One could suggest that hotels in New York City focused on raising occupancy during this period and sacrificed rate growth. However, during 2012, occupancy growth was relatively consistent in both areas studied; the United States average occupancy increased 2.5 percent versus Manhattan at 2.8 percent. Of the top 25 U.S. markets, only Phoenix has underperformed NYC in terms of ADR percent change from the prior peak.  ADR in the Phoenix market is 15.7 percent less than the 2007 peak, whereas NYC is approximately 11.0 percent less.  Over the past six years, ADR in Manhattan has declined at a compound annual rate of 1.4 percent. During this time period, the average CPI increase in the New York MSA was 2.2 percent. Based on my knowledge of the NYC lodging market and discussions with owners and general managers, I have surmised the following factors which may be influencing ADR growth.
  • New Supply: NYC has experienced a rapid expansion of new hotel development over the past several years. Between January 2006 and December 2012, the city experienced the greatest increase in supply on record. The net increase in room inventory has been greater than 5.0 percent per year for the past four years. Notable openings in 2012 include the following (hotel, opening date, and location):122-room Holiday Inn New York City - January 2012 - Midtown
  • 173-room Tryp by Wyndham New York City - February 2012 - Times Square South   
  • 463-room Conrad - March 2012 - Financial District (conversion from Embassy Suites)
  • 168-room NoMad Hotel - April 2012 - Flatiron
  • 367-room Pod 39 Hotel - July 2012 - Murray Hill
An additional 20 to 25 hotels are expected to open in 2013 (approximately 3,200 rooms) including the Hyatt Union Square, Hyatt Place Midtown South, CitizenM Hotel, Holiday Inn Lower East Side, Courtyard Midtown South, NYLO Upper West Side, in addition to others. While the increase in supply may be a catalyst for reduced ADR growth, it has not had a material affect due to the strength and diversity of demand in NYC.
  • Chain Scale: Our research indicates many of the new hotels opening in NYC are smaller, lower-tier properties.  A major trend during this rapid period of supply growth in NYC has been the introduction of more select-service/mid-scale branded hotels.  The increase in rooms in the lower-tier chain scales are having an effect on market ADR growth, as these properties typically charge less than upscale and luxury hotels. Based on the increase in mid-scale hotel chains, New York is now considered a "more affordable" market which could lead to an increase in tourism over the next several years.
  • $ vs. % Change: The Manhattan hotel market has historically been one of the highest rated markets in the country. The ADR as of year-end 2012 was close to $285 compared to the U.S. average of $107 based on Smith Travel Research data. The Manhattan market ADR is approximately 2.7 times greater than the U.S average; therefore, the percentage growth results in a much greater increase in the actual dollar amount compared to other markets across the country.  For example, a 5.0 percent increase in the national ADR results in an increase of $5.33 versus a 2.0 increase in the Manhattan ADR which leads to an actual dollar increase of $5.68.
It should also be noted that during the fourth quarter of 2012, percentage ADR growth began to pick up compared to the first three quarters of the year. While investors were worried about the effects of Hurricane Sandy on the NYC market, many of the properties unaffected by water damage or power outages achieved a better than expected November and December RevPAR.  Many of these hotels were housing displaced families as well as guests who were re-booked from damaged properties.

I frequently receive calls from hotel owners and investors asking how the recent surge in supply growth will affect the overall market.  Despite the recent “slump” in ADR percentage growth, I believe the long-term fundamentals of the market are strong.  The overall market occupancy is approximately 85 percent; which suggests enough un-accommodated demand to fill the new hotel rooms.  However, each neighborhood of the city should be analyzed individually.  In many cases, the “competitive market” for a hotel property in NYC is no more than a two block radius.  Pinnacle Advisory Group has the ability to evaluate the performance of proposed, newly opened, and existing hotel properties through a detailed market analysis.

Please contact the New York Office of Pinnacle Advisory Group for more information on the NYC hotel market including a detailed listing of new development projects.
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About the Author:
Jonathan Jaeger is a Vice President with Pinnacle Advisory Group who heads up the New York City Office. Mr. Jaeger is a graduate of the School of Hospitality Administration at Boston University and has been with Pinnacle for over five years. During his tenure, Mr. Jaeger has completed over 150 assignments and analyses of hotels around the country. Licensed as a certified general real estate appraiser, Mr. Jaeger is a Candidate for Designation with the Appraisal Institute.

About Pinnacle Advisory Group
Since 1991, Pinnacle Advisory Group has provided advice and analysis on the full spectrum of hospitality properties throughout the US and Caribbean: hotels, resorts, conference centers, mixed use projects, convention centers and exhibition centers.  Pinnacle's services include development counseling, appraisals, acquisition due diligence, asset management and litigation support. Our clients include leading hotel companies, REITs, universities, major banks and municipalities. We specialize in providing personalized advice on complex projects, carefully tailoring our services to each client's individualized needs.
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Contact: 

Pinnacle Advisory Group – New York Office
Phone – 212.292.4824
Email – jjaeger@pinnacle-advisory.com
1271 Avenue of the Americas, Suite 4300
New York, NY 10020
www.pinnacle-advisory.com



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