The Waterford Crystal Ball's slow descent upon the millions of revelers in Times Square on December 31st signified the end of the Millennium, representing a symbolic backdrop to reminisce about the happenings of 1999 as well as the past century. Along with the festivities of the New Year, we celebrated another strong year for the Manhattan lodging market. The market was characterized by growth in average daily rates, healthy construction levels and increases to room night demand.

Three new downtown hotels, the Wall Street Inn, the Holiday Inn Wall Street and the Regent Wall Street opened in 1999. In midtown, a significant trend this year included conversions to boutique hotels as two properties, the Doral Court and Doral Tuscany, became the W Court and W Tuscany, respectively. In addition, the Time Hotel, the Benjamin Hotel and On the Avenue Hotel also opened as products of conversions. Capital is again available for development, although on a selective basis, as evidenced by the eleven hotels currently under construction and anticipated to open between early 2000 and Summer 2001. This development activity represents an addition of 3,702 rooms (a 6.4 percent increase) to the market. Although Manhattan experienced a slight decrease in occupancy during 1999, developers and lenders have not been discouraged, as evidenced by the planning of eight new properties (totaling approximately 2,420 rooms) which are anticipated to come on line between 2000 and 2003. 
 

Based on STR October year-to-date 1999 figures, we anticipate that the Manhattan lodging market will achieve a composite occupancy of approximately 81.0 percent in 1999, as compared with 82.8 percent in 1998.  This marks the first year since 1991 that the Manhattan lodging market will have experienced a decrease in occupancy. Manhattan�s annual room night demand is anticipated to increase 0.7 percent from 1998 to 1999 levels while room supply is anticipated to increase by 2.9 percent. The supply increase can be attributed largely to the expansion of the Shoreham and Millennium Broadway, the opening of the Regent Wall Street, Wall Street Inn and the Holiday Inn Wall Street, the

Revenue per available room (RevPAR) for Manhattan hotels is also estimated to reach a record-level of approximately $164 in 1999, an increase of 1.7 percent over 1998. Although RevPAR growth is slower than what has been achieved over the past several years, sound market fundamentals have contributed to the continued success of the Manhattan lodging market.

MARKET SEGMENT ANALYSIS

A robust economy and high levels of consumer confidence continue to support lodging demand in Manhattan. With Manhattan experiencing a significant number of  �sell-out� days per year, when all the hotels in the borough are sold out, it is evident that Manhattan�s luxury, upscale and mid-price segments continue to perform at strong levels. Since 1993, occupancy has increased by approximately 2.0 percent on a compound annual basis. While Manhattan continued to attract visitors willing to pay higher rates for accommodations, new hotel openings and expansions coupled with a slight downturn in the lodging cycle, contributed to slight declines in overall market occupancy.

Luxury

Based on STR�s October year-to-date figures, we anticipate that the luxury segment will finish 1999 with an occupancy of 79.0 percent, a 2.5 percent decrease from 1998�s record levels. This segment�s occupancy posted a slight decrease as did the overall Manhattan and mid- price segment occupancy as room night demand for this segment decreased by approximately 0.8 percent as of year-end 1999 compared to year-end 1998.  The room supply increase of approximately 1.7 percent can be attributed to the Shoreham�s 92-room expansion, the opening of the 209-room Benjamin Hotel and the reopening of the 242-room Peninsula which was under renovation in 1998.

Average daily rate is anticipated to reach approximately $298 in 1999, a 3.4 percent increase over 1998. Average daily rate growth continues to exceed inflation, although at a lower spread relative to previous years. Estimated RevPAR of $235 for this segment reflects a 0.8 percent increase over last year�s RevPAR level.
 

The upscale segment achieved favorable results again in 1999. Based on STR�s October year-to-date figures, we anticipate 1999 year-end occupancy for the upscale segment to reach 80.0 percent, a 0.6 percent increase from 1998.  According to STR, there was a 3.1 percent increase in supply as of October 1999 as compared to October 1998, while room night demand increased by a healthy 4.5 percent during the same period. By year-end 1999, we anticipate room supply will increase by 2.7 percent as compared to year-end 1998 figures, while room night demand will increase by 3.3 percent over last year. The supply increase can be partially attributed to the opening of the 713-room W Hotel New York and the 532-room Holiday Inn Broadway in late 1998 as well as the opening of the 138-room Holiday Inn Wall Street and the 125-room expansion to the Millennium Broadway in 1999. Average daily rate for this segment is anticipated to reach $213, a 2.4 percent increase over 1998 results. Record level room rates achieved by the luxury segment have contributed to the upscale segment�s ability to increase rates as well. The difference in average daily rate between the two segments was approximately $80 in 1998 and the gap has widened to approximately $85 in 1999.  In 1999, the upscale segment achieved a greater percentage growth in RevPAR over the Manhattan and luxury segments. We anticipate RevPAR for this segment to end the year at an estimated $170, an approximate 3.0 percent increase over 1998.
 

Mid-price

Based on STR�s October year-to-date figures, we anticipate occupancy for this segment to decrease by 2.4 percent from 1998 levels to an estimated 84.0 percent for 1999.

Room night demand continues to increase with 1999 experiencing an estimated 1.3 percent growth from 1998 levels. Room supply increased by an estimated 4.0 percent in 1999, which can be attributed to the opening of the 308-room Courtyard by Marriott on Third Avenue and the 240-room Courtyard by Marriott on West 40th Street in November and December of 1998, respectively. 

Average daily rate for this segment is estimated to reach $142 in 1999, a significant 10.6 percent increase over 1998.  Similar to the upscale segment, the mid-price segment continues to benefit from the overall market increases in average daily rates. The gap between the upscale and mid-price market average daily rate decreased from approximately $80 in 1998 to approximately $71 in 1999. 

In 1999, the mid-price segment achieved the highest growth in RevPAR compared to the overall Manhattan, luxury and upscale segments. We anticipate RevPAR for this segment to end the year at an estimated $119, a significant 7.8 percent increase over 1998. Based on STR data, the annual RevPAR growth in this segment has been consistently strong since 1994, increasing at a compound annual rate of 12.3 percent.
 

LEADING THE HEADLINES IN 1999

Visitation and Tourism Continue Their Upward Trend.  Historic increases in air passenger traffic, visitation, convention attendees and group bookings demonstrate the growing appeal of New York as a tourist and convention destination to travelers, as well as its position as a global commercial center. According to the Port Authority of New York and New Jersey, over 83 million visitors travel through the City�s three airports each year. The New York Convention and Visitor�s Bureau estimates that by year-end 1999, 29.4 million domestic travelers and 6.0 million international travelers will visit New York City for a total of 35.4 million people, representing a one percent increase over 1998 visitation statistics.

According to the New York Convention and Visitor�s Bureau, there are no definite plans for expansion of permanent exhibit space at the Jacob Javits Center.  However, in 1998, a $4 million temporary exhibit hall was constructed adding 54,400 square feet of space to the Center, which now totals 814,000 square feet.  According to the Standard & Poor�s DRI, proponents of the Convention Center expansion believe that increased capacity would enable New York to compete more effectively for large shows and conventions, which would benefit the local hotel and retail sectors.

Emergence of Manhattan's Silicon Alley. Leading the headlines this year was the strength of Silicon Alley, the area south of 23rd Street and north of the Financial District. New York�s answer to California�s Silicon Valley specializes in Internet advertising, publishing/content, design and consulting. The industry in the area is called New Media which involves providing/developing products and services for use via the Internet. The New Media industry has created an unbridled demand for expansive, fully-wired space in the Midtown South and Downtown office submarkets. Reportedly, Silicon Alley has outpaced Silicon Valley in the number of initial public offerings with an influx of $496.8 million in capital as of year-end 1998. Already enjoying this steady stream of venture capital, New York�s high-tech industry obtained $759.1 million in venture capital funding by mid-year 1999. This amounts to 7.2 percent of the total high-tech venture capital funding in the United States. According to the Empire State Development Corporation, New Media companies added 30,000 jobs to the City�s economy in the last 18 months. By 2000, it is anticipated that New Media jobs will account for 188,000 jobs in Manhattan.  This sector�s growth was facilitated by Governor Pataki�s exemption of the Internet access fees from the state sales tax in addition to the sales tax on computer hardware used for software development. The demand for space in this area has contributed to increasing rents and decreasing vacancy rates. Rent per square foot in Midtown South has increased by 61 percent, while vacancy rates in the area decreased from 11.3 percent to 7.1 percent since 1996.

Manhattan Office Market Remains Strong. The commercial real estate sector has experienced significant growth in recent years as evidenced by the decrease in office vacancy rates in Manhattan. Manhattan�s real estate markets have shown significant strength, with overall office vacancy rates of 5.7 percent as of 2nd quarter 1999.  Furthermore, more than 3.4 million square feet of office space development (most of which is pre-leased) is estimated to be completed within the next two years, specifically within Times Square, Columbus Circle, World Trade Center and Grand Central areas. According to information from 2nd quarter Torto Wheaton Research, these four office markets achieved the following vacancy rates and rents per square foot: Times Square office market had a vacancy rate of 3.0 percent and a gross asking rent of $44.81; Columbus Circle office market had a vacancy rate of 3.5 percent and a gross asking rent of $45.75; World Trade Center office market had a vacancy rate of 3.5 percent and a gross asking rent of $39.01; and Grand Central office market had a vacancy rate of 7.9 percent and a gross asking rent of $43.96.

Catching a Train? The strength of New York�s economy is underscored by the number of transportation projects planned for the next few years. On September 29th, the MTA approved a plan to build a Second Avenue subway line and to build connecting tracks between the Long Island Railroad and Grand Central Terminal. The $700 million Second Avenue subway is expected to originate at 125th Street in Harlem to 63rd Street in Midtown. The project is anticipated to be completed by 2015. Slated for a 2009 completion is the LIRR/Grand Central line which would involve building ten tracks and five platforms, two miles of tunnels, a new station and a rail yard. The new line is expected to cost approximately $1.5 billion. In early November, the Federal Transit Administration granted $43.8 million to be used for the LIRR/Grand Central project.  The MTA board approved a five-year capital plan of $17.5 billion to finance the two projects, although the plan must still pass through various boards through next year. 

Anticipated to begin operating in 2002 or 2003, the AirTrain will provide a connection between John F. Kennedy International Airport and New York City subways and the Long Island Railroad through Jamaica Station and Howard Beach. The $1.6 billion project will be partially funded through a $3 per plane ticket surcharge. Additional financing will come from American Airlines and British Airways, both of which have signed long-term leases in the new Pennsylvania Station, slated to open in 2003. There will be designated areas for passenger and luggage check-in at Pennsylvania Station for those traveling to the airport. 

The existing Pennsylvania Station, located below Madison Square Garden, currently houses Amtrak, the Long Island Railroad, and New Jersey Transit. The Pennsylvania Station Redevelopment Project involves relocating Amtrak across Eighth Avenue into the James A. Farley Post Office Building. Trains are expected to be running in the new $750 million station by 2003. Federal loans of $160 million and federal aid of $60 million were announced for the Post Office building in September and November of 1999. The new station is expected to encompass retail, storage, and commercial components in addition to the train service. Amtrak service will relocate to the new Pennsylvania Station, while New Jersey Transit and the Long Island Railroad will remain in the existing Pennsylvania Station.

Red Lights to Bright Lights in Times Square. The revitalization of Times Square continues to draw tourists and businesses captivated by the energy and accessibility that the area offers. The �New� Times Square has become home to approximately 5,000 businesses including MTV, Viacom, Conde Nast, the New York Times, Morgan Stanley, ABC�s �Good Morning America�, and Polygram Records. With a number of office towers under construction or nearing completion, coupled with the opening and development of a number of entertainment complexes, restaurants, and hotels, Times Square is booming. Conde Nast Publishing, Skadden Arps Slate Meagher & Flom law firm, and NASDAQ�s broadcast and marketing center have begun to relocate from other submarkets into Durst Organization�s 1.6 million square foot building at 43rd and Broadway.  Morgan Stanley is constructing a 1.6 million square foot office building on Seventh Avenue between 49th and 50th Streets. In addition, on December 10, the steel construction was completed on Rudin Organization�s 853,000 square foot, 30-story office building located at 3 Times Square (42nd Street and Seventh Avenue).

Planned office developments include: 5 Times Square, a 1.1 million square foot building on 42nd Street and Seventh Avenue to be occupied by Ernst & Young; an 840,000 square foot mixed-use site including office and retail at 56th Street and Broadway; and Durst�s 1.4 million square foot site at 42nd Street and Sixth Avenue. This increase in office space is expected to bode well for lodging demand in the Times Square area. During 1999, the Hampshire Broadway became The Time Hotel located on West 49th Street between Broadway and Eighth Avenue and the Millennium Broadway completed the Premier, a 125-room expansion on West 44th Street between Sixth Avenue and Broadway.  The 550-room former Planet Hollywood Hotel is under construction on 47th Street and Broadway and should be completed in July 2000. The 444-room Doubletree on 42nd Street located between Seventh and Eighth Avenues, and the 400-room Sofitel located on 44th Street between Fifth and Sixth Avenues are anticipated to commence operation by May and June 2000, respectively.

Radio City Music Hall Renovated. After a $70 million, seven month renovation completed in October, Radio City Music Hall hosted a party to celebrate its �new� old look. If New Yorkers and tourists were unable to see the renovated building for the annual �Christmas Spectacular�, they may have had a chance to marvel at it from home when the opening event was televised in mid December. The sheer numbers involved in recreating the Art Deco style that made Radio City a landmark are astounding: 5,901 seats with new fabric, 4,178 organ pipes retuned, a 3,000 pound curtain restored, 2,000 workers, and 700,000 sheets of gold and silver to adorn the ceiling and walls. Radio City Music Hall has been restored to its original 1932 decor.

Boutique Hotels Enter Market in Record Numbers.  Boutique hotels offer non-traditional lodging options to an increasing customer base that is seeking more interesting alternatives to the conventional hotel. A boutique hotel is typically comprised of 150 rooms or less (although, there have been �boutique concepts� applied to larger hotels such as the Paramount Hotel and the W Hotel to name just a couple) and provides more personalized service and a more unique experience concept than a traditional hotel. Due to space constraints in Manhattan and the cost associated with constructing new hotels, boutique hotels have been commonly created through the renovation of smaller independent hotels or office buildings. The Manhattan lodging market as is evidenced by continued development including, The Library (60 rooms), Hotel Giraffe (77 rooms), Dylan Hotel (108 rooms) and 60 Thompson (100 rooms). The majority of neighborhoods in Manhattan are anticipated to have a boutique hotel within their boundaries in the next few years.