Manhattan Lodging Report / Our Top Ten Thoughts for 2000 and Beyond / Ernst & Young LLP / Jan 20

| January 01, 2000

Manhattan Lodging Report – 1999 – Our Top Ten Thoughts for 2000 and Beyond – Including 20th Century Manhattan Milestones Ernst & Young LLP January, 2000 – The millennium and beyond should remain promising for the Manhattan lodging industry. Our top ten thoughts are as follows:

1. Stable to Decreasing Occupancy Levels:

In 2000, we should see another slight decrease in overall Manhattan occupancy levels as new rooms continue to come on line as indicated in the Proposed Hotel Developments chart. Although, in Manhattan and on a national level, the economy is still quite robust, growth has moderated which has had an effect on demand for lodging accommodations, particularly in the commercial segment. Leisure travel continues to be healthy, particularly as a result of high levels of consumer confidence. The imbalance between new supply and room night demand has caused levels to stabilize and in some cases decrease slightly. However, it should be noted that Manhattan’s extraordinary occupancy levels which were at their practical maximum levels in 1998, triggered aggressive average rate increases. These increases may have driven consumers to outer boroughs for more reasonably priced accommodations thus impacting occupancy levels in Manhattan.

2. Moderate Growth in Average Rate:

In 2000, Manhattan should experience continued average rate growth, albeit not at the pace experienced over the past several years. Manhattan hotel operators should be practicing aggressive yield management techniques to balance the slow down in room night demand with historic pressure to grow average rate. Although a high level of unaccommodated lodging demand still exists in Manhattan, new supply within Manhattan and in the outer boroughs may cause operators to suppress rate increases to retain a loyal customer base. Increases in profitability will need to be driven more from cost control strategies and tactics.

3. Challenging Capital Markets:

The recent capital markets crunch has stalled, but not completely halted, hotel development in Manhattan. A number of attractive hotel developments were able to receive financing prior to the crunch or through strong banking relationships and/or creative structurings. As such, Manhattan will have an influx of new rooms in 2000. However, numerous projects are on hold as financing for ground-up development and major redevelopment still remains elusive. Many hope that the advent of Y2K may loosen the reigns on financing for real estate. Much depends on the continued strength of the economy and Wall Street’s perception of the industry which continues to be cautious thus suppressing the value of lodging stocks.

4. Continued Transaction Activity:

Hotel companies with aggressive expansion plans favor acquisitions of existing product rather than new development and are patiently waiting for more favorable hotel pricing. Despite Wall Street’s view of the sector, there has only been a slight increase in hotel capitalization rates, and most pricing remains aggressive. Conceivably, many potential sellers are waiting until after the Millennium for a more stable transaction environment. It is likely that hotel transactions will continue at a steady pace as market fundamentals for the Manhattan lodging market remain strong.

5. Increased Presence of Urban Entertainment Centers:

Various areas around Manhattan will continue to emerge as urban entertainment centers with plans for development underway in areas such as the following:

Battery Park City: Battery Park City continues to be developed as a 24-hour urban entertainment market with two significant projects underway. As previously mentioned, FCR’s mixed-use project is anticipated to include the following components when completed: a 463-room Embassy Suites Hotel with an upscale, Larry Forgione-operated restaurant, a 16-screen Regal Cinema, a New York Sports fitness center, retail space and other restaurants. The hotel’s 13-story atrium will be decorated with art work in an effort to promote a community-oriented tone to the public space. In addition, Millennium Partners also broke ground on their $205 million mixed-use development in the area. The complex includes a five-star Ritz-Carlton hotel, luxury condominiums, the Skyscraper Museum and upscale restaurants. The building overlooks New York Harbor with views of the Statue of Liberty.

Columbus Centre: Once completed in late 2003, the 2.7 million square foot mixed-use development will be one of the largest in New York. It will include a 750,000 square foot Time Warner headquarters, 685,000 square feet of retail and restaurants, the Mandarin Oriental hotel, luxury condominiums, and a 1,200 seat hall. As of late September, the development joint venture of The Related Companies, Palladium Co., and Apollo Real Estate Advisors had yet to secure financing for the $1 billion project. This does not stop the CEO of Related Companies from referring to Columbus Centre as the “…Rockefeller Center of the 21st Century.”

Harlem: While the Harlem Renaissance occurred in the 1920s, Harlem’s Revitalization is occurring in 1999 with no end in sight. Harlem has recently seen a decrease in crime and an increase in number of tourists. In April, Pathmark supermarket opened on 125th Street and Lexington Avenue as the first full-service supermarket in thirty years to come to the area. Even the ever-present coffee giant, Starbucks, understands the economic potential of Harlem as it opened its doors in May on 125th Street and Lenox Avenue. Harlem USA, a Magic Johnson multiplex theater and shopping center located between St. Nicolas Avenue and Frederick Douglass Boulevard, is anticipated to open by Spring 2000. These developments are anticipated to be the catalyst for new development in the area.

In November 1999, Governor Pataki announced plans for an $85 million retail/office/hotel complex called Harlem Center to be located next to the Adam Clayton Powell Jr. State Office Building. The project is anticipated to be co-developed by Forest City Ratner and the Abyssinian Development Corporation. Construction of the Harlem Center is expected to commence in Spring 2000 with the first phase (a three floor indoor mall) to be completed by 2001 at a cost of $30 million. Seventy percent of the 110,000 square foot retail space has been leased. The second phase involves the construction of a 150-room $55 million hotel with a Marriott, Ramada, or Doubletree flag.

— The Hotel Theresa, once called the Waldorf of Harlem, was a premier social hub from the 1930s to the 1960s. Famous guests included Joe Louis, Jimi Hendrix, Malcolm X and Fidel Castro. — Governors Island: The former Coast Guard base, located one half mile from the southern tip of Manhattan, is planned to be developed with a hotel, spa and conference center, retail, apartments, public parks and at least one museum. In addition, an educational center and a sports complex are included in the plan. The development plan, created by Governor Pataki and Mayor Giuliani, must be approved by Congress before it can proceed. At that time, approximately $30 million is anticipated to be spent to prepare the island for development. The hotel/spa/conference center component will be developed in a former military garrison, a historic landmark which will be renovated to complete the project.

6. Redevelopment of Non-Traditional Hotel Areas:

West Village, SoHo and Downtown Manhattan are anticipated to see the most hotel supply growth in the area’s history in 2000 and the next few years. Projects include the Regent Hotel, Embassy Suites, TriBeCa Grand, Ritz-Carlton and 60 Thompson. Hotels have blossomed in the area as it has become a 24-hour neighborhood. The area is not only seeing more tourists but also more business executives. Longer trading hours on the exchanges and the infusion of the New Media and information/technology firms has translated into the emergence of downtown as both a place to work and to live. For decades, the area, particularly the Meat Packing District, has been one of the least appealing real estate markets in Manhattan. Recently, restaurants have been attracted to the meat packing district’s low rents and large spaces. Additionally the 200-room Greenwich Village Hotel has been proposed for a site on 13th Street and Ninth Avenue.

7. Hotel Development in Outer Boroughs and Northern New Jersey:

Due to a strong regional economy, Manhattan’s inflated room rates and overflow demand, the boroughs and Northern New Jersey have experienced rising occupancies and ADRs. There are developments in various phases within the boroughs and in New Jersey that will affect the areas’ hospitality industry. On the New Jersey waterfront, a nine-story Hyatt Regency Hotel is anticipated to be built within a mixed-used project at Harborside Financial Center. Another mixed-use project being developed is Jersey City’s Colgate Center which will include a 400-room hotel. Staten Island is slated to see the development of its second hotel according to developer Richard Nicotra. He plans to build a 160-room Hilton Hotel at the Staten Island Corporate Park for approximately $20 million. The Island has also been approved as the location of a minor league baseball stadium. The 7,500 seat stadium will be located on the waterfront next to the Staten Island Ferry Terminal. While still in the planning stages, the Pomeranc Group may develop two 200-room hotels to the Queens market. One hotel is anticipated to be located at John F. Kennedy International Airport while the other, a 217- room Ramada Inn, is anticipated to be located on 114th Street and 37th Avenue in Corona. While the Bronx has no hotel developments planned, the borough is home to a tourist attraction and a possible future attraction that will affect the industry. The $43 million, 6.5 acre wildlife habitat named Congo Gorilla Forest opened in June of 1999. The exhibit features 300 animals. By the end of 1999, the Planning Commission will vote on the development of an 18-hole, $22 million Jack Nicklaus golf course. If approved, construction of the course is expected to commence in 2000 and be completed within eighteen months. (Editor’s note: We think the Yankees will stay in the Bronx!) A new hotel has been proposed for Brooklyn’ s DUMBO (Down Under Manhattan Bridge Overpass) area. Architect Jean Nouvel hopes to realize the same performance levels which the Brooklyn Marriott has been able to achieve.

8. Jacob Javits Convention Center Status:

As of mid-October 1999, the plans to expand the Jacob Javits Convention Center on 34th Street and 11th Avenue had been stalled. New York City’s Mayor Giuliani opposes the expansion of the 814,000 square foot state-owned facility. The original plan was to expand the Convention Center to 31st Street at a cost of $700 million which would double the floor space. While Governor Pataki is in favor of the expansion, Mayor Giuliani is in favor of building a new sports stadium in the area either for the New York Jets or Yankees. No final decisions have been made.

9. New York’s Senate Race to Heat Up:

As Rudolph Giuliani faces off with Hillary Clinton for the senate seat being vacated by Senator Moynihan, the Manhattan lodging market is anticipated to receive some residual effects. Demand for hotel rooms in the City will continue to increase partially aided by fund raisers and other election activities.

10. High – Tech Amenities Become the Norm:

Hotels are focusing on making all their guest rooms high-speed Internet accessible. E&Y’s recent survey of numerous upscale hotels within Manhattan indicated that amenities such as fax machines, VCRs, cordless telephones, Web TV, computers and compact disc players are becoming more prevalent, either as standard guest room equipment or available through the concierge.

— In 1903, the St. Regis pioneered central air conditioning with individual in-room controls. Upon opening in 1907, the Plaza featured electric clocks and private telephones in every room. — 20th Century Manhattan Milestones Most Influential Individuals:

Ian Schrager / John Jacob Astor

Most Prominent Hotel Developments:

Waldorf=Astoria / Marriott Marquis

Greatest Technological Innovation:

The Computer and its Capabilities

Most Significant Event:

Development of Mass Transportation

Favorite Hotels:

Four Seasons / The Plaza

Results are based on a survey of prominent industry professionals. 20th Century Manhattan Milestones Most Influential Individuals: