New York City - NYC - Global Hotel Network

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companies and 35 foreign chambers of commerce located within its boundaries. • The World's Communication Center: New Y
AAAAAAAAAAA GHN Market Report: New York City

Mark Van Stekelenburg Managing Director CBRE Hotels | PKF Consulting USA, a CBRE Company

We have presented an overview of the New York City lodging market, including an assessment of the economic patterns and demand generators driving the lodging market. We have presented commentary on the current dynamics of the local lodging market and its reaction to currency fluctuations, industry disruptors, and the level of supply recently coming online and planned within the pipeline.

NEW YORK CITY OVERVIEW The following paragraphs provide a discussion of economic and social factors affecting New York City and Manhattan. New York City retains its international reputation as: a center of arts, culture and fashion; a leader in health care, science, and education; and a hub of financial and commercial activity. Despite challenges from internal and external forces, the City maintains its preeminent role in world affairs and is expected to continue to retain this position for the foreseeable future. New York City holds leading positions in a variety of industries, maintaining strong ties with the rest of the Nation and the global economy. Its leadership roles can be recognized in the following areas:

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The World's Financial Center: Wall Street accounts for more than 50 percent of the world's total equities market. New York City ranks second only to London as a foreign exchange center. The Nation's Corporate Nerve Center: New York City is home to the headquarters of many of the Nation's biggest corporations, including 52 of the Fortune 500. In addition, many more corporations are located in the area surrounding the City, adding to the dynamics of the economic base as a whole. The Center for International Finance and Commerce: Drawn by the size and sophistication of the City's financial center, more than 2000 foreign banks operate in New York, an amount greater than the combined number of banks in Los Angeles, Chicago, Houston, San Francisco, and Miami. Approximately 20 percent of office space in the City is foreign-owned, with 25,000 foreign companies and 35 foreign chambers of commerce located within its boundaries. The World's Communication Center: New York City is the world's largest producer and consumer of news, with more than 170 newspapers, magazines, and radio and television stations. The Major Retail and Consumer Market: The City has one of the largest consumer markets in the world, with over 19 million people within an hour’s drive. The Major Publishing and Garment Manufacturing Center: There are currently over 23,000 people employed in apparel manufacturing and more than 55,000 employed in publishing. A Leading Education and Scientific Center: New York City has more than 130 institutions of higher learning and has one of the largest concentrations of technical and engineering schools in the country. A Major Transportation Hub: New York City's vast and growing transportation network has contributed to its growth as a business center. Its facilities include the Nation's largest mass transit system, three major international airports, a deep water port facility, two main rail terminals, Port Authority's bus terminal, over 55 bridges, and three tunnels connecting the City with outlying areas, four interstate highways, six parkways, and the Staten Island Ferry. The Nation's Leading Art, Culture, and Tourist Center: New York City is home to world-renowned museums, galleries, theaters on and off Broadway, around 17,000 restaurants, and a variety of other cultural and social attractions. Tourist visitation to New York exceeded 56,000,000 in 2014.

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AAAAAAAAAAA Employment: The financial markets, including those in the City, are cyclical and have recently entered a period of consolidation with mergers and acquisitions that are anticipated to bring job losses in the short term, but may well lead to job gains in the longer term. The following table illustrates the largest employers in New York City.

The Independent Budget Office (“IBO”) is a publicly funded New York City agency that provides nonpartisan information about New York City's budget to the public and their elected officials. The following is a quotation from the IBO’s March 2015 Analysis of the Mayor’s Preliminary Budget for 2016. “IBO’s economic forecast for the city anticipates growth throughout the financial plan period, although this growth slows after calendar year 2016. Following a year in which the city

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AAAAAAAAAAA experienced unprecedented job growth of nearly 121,000 (based on recently revised labor department figures), IBO anticipates the city will add more than 96,000 jobs this calendar year and an additional 80,000 jobs next year. In the remaining years of the financial plan, we expect job growth to gradually slow, with annual employment gains projected to fall to an average of about 54,000 in 2017 through 2019. Looking beyond the number of new jobs anticipated, IBO’s economic forecast shows a change in the mix of jobs being created, with low-wage jobs comprising a smaller share of the employment increases than in the recent past. The largest shares of our projected employment growth will be coming from education and health care services (28.5 percent), professional and business services (26.7 percent), and leisure and hospitality (14.6 percent). IBO’s outlook for tax revenue growth follows the general pattern of our projections for employment growth. While over the course of the five-year plan period we estimate tax revenues will increase by an average of 4.6 percent annually, the growth is a bit higher than the average in 2015 and 2016 and lower in 2017 and 2018. In dollar terms, we project tax collections will grow from nearly $49.9 billion this fiscal year to $52.2 billion in 2016, an increase of $2.3 billion. IBO expects tax revenues will reach $56.9 billion in 2018. While this forecast clearly anticipates sustained tax revenue growth, it is relatively moderate growth compared with increases in the recent past. During fiscal years 2010 through 2014, tax revenue grew at an average rate of 6.4 percent; we project average growth this year and next at a more modest rate of 4.8 percent. Under IBO’s re-estimate of the Mayor’s financial plan, expenditures are forecast to rise more slowly than tax revenues. We project total expenditures will grow from $78.8 billion this year to $87.3 billion in 2019, rising at an average annual rate of 2.6 percent. While there are no new big-ticket spending initiatives proposed under the Mayor’s preliminary budget, there are a number of relatively small measures to create new programs or expand existing services.” The following table presents the historical unemployment rates for New York City, New York State, and nationally.

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The following chart outlines total employment and the composition of the different employment industries in New York City between 2004 and 2014.

The steady growth experienced between 2005 and 2008 was offset by the large loss of jobs resulting from the recession as total employment declined 2.6% in 2009. However, New York City has returned to stable growth in the last four years, as total employment has grown by 2.3%, 2.3%, 2.5% and 3.0% respectively. Total employment growth in 2014 was the greatest New York City has experienced on an annual basis in the last ten years. New York City is predominantly a service-oriented economy, with approximately 95% of the current employment within the services producing sector. In the period between 2005 and 2014, the services producing sector experienced average annual growth of 1.6%. The following table and chart illustrate the increase in employment for the most recently reported month, over the same month of the previous year. As indicated, total employment is showing an

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AAAAAAAAAAA increase from the prior year's figures. Just the manufacturing sector displayed an employment decrease on a year over year basis in NYC.

Wall Street The vital securities industry will continue to steady after a double-dip contraction, but growth will remain modest. Industry payrolls have rebounded to their highest level in more than two years, but disappointing fourth quarter results for New York's biggest banks are a concern. Citigroup's $3.5 billion fourth quarter legal expenses nearly wiped out its profits, while legal costs and disappointing trading revenue hurt JPMorgan Chase and Bank of America. The wave of bad news will weigh on hiring and, combined with ongoing efforts to adapt to tight regulation, keep financial services in check. While the outlook is relatively pessimistic, some upside risks are embedded in the forecast. The Republican-controlled Congress has begun to roll back some Dodd-Frank provisions, with additional efforts to reduce regulation expected. If successful, this could eventually lead to a surge in hiring. In addition, compensation that was deferred during the financial crisis is now being paid; higher wages could help rejuvenate the industry's allure to young professionals. Tech One of the primary reasons that Wall Street jobs are becoming harder to fill in New York is the rise of Silicon Alley, which will continue to power growth. After faltering during the summer, tech payrolls have reached a new peak and venture capital has soared to its highest level since 2000. Google has more than doubled its New York workforce since 2009, mostly by adding highpaying software engineering positions.

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AAAAAAAAAAA City leaders are also doing their part to promote additional industry growth. The mayor has resurrected a tech steering committee and local agencies are working to bring an increased tech presence to neighborhoods like Roosevelt Island and Harlem. In addition, tech academies are emerging throughout New York, as demand for software developers permeates Silicon Alley. This local infrastructure, along with thriving firms, will make high tech an increasingly important driver. Commercial Office Market: The office market represents a source of demand for lodging accommodations and a review of recent trends is meaningful. With almost 400 million square feet of office space, Manhattan remains the largest office market in the United States. Given business travel accounts for a substantial portion of the overall demand base for New York City hotels, the health of the New York City hotel market is directly tied to the success of the New York City office market. In order to illustrate this relationship, we have compared the historical city-wide occupancy percentages for the Manhattan office and hotel markets dating back to 1992.

The chart above illustrates the close correlation between hotel occupancy and office occupancy. Manhattan Office Inventory A first quarter 2015 summary of the Manhattan office market is presented on the following table. Copyright © 2015 GlobalHotelNetwork.com. All rights reserved.

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The NYC office market as tracked by CBRE contains approximately 394.3 million SF of rentable area within 786 buildings. The current overall average asking rent in Manhattan is $68.05/SF with a current availability rate of 11.08%, and a vacancy rate of 7.37%. The Jacob Javits Center New York City has always been a mainstay for large events such as international conventions, trade shows and exhibitions. Such events draw large crowds and travelers from all over the world. The Javits Center is New York City’s primary convention and exhibition center. The center’s 840,000 gross square feet of exhibition space can be divided into ten Summary halls. In the summer of 2010, the Javits Center gained additional space with the construction of a 110,000 square foot pre-engineered structure known as Javits Center North. Additional renovations to the main building were completed in 2014 and included replacing the roof of the main building, enhancing curtain walls and skylights, enlarging and reconfiguring the main entrances and replacing/upgrading building systems. In addition, an environmentally green roof was installed that is the largest in the Northeast.

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AAAAAAAAAAA While the mix of shows and events change with each calendar year, Javits hosted approximately 86 major trade shows and conventions and 16 public shows in 2013. Attendance topped 2.1 million in 2013 with convention delegates having an economic impact of more than $1.5 billion annually and contributing more than 400,000 hotel room nights to New York. The chart below illustrates the revenues generated from space rentals and event related services at the Javits Center over the past 6 years:

It is noted that revenue increased sharply in 2014 returning to pre-recession levels. We do note that in early January 2012 New York Governor Cuomo announced a plan to build the largest convention center in the US near Aqueduct racetrack in Queens (near JFK Airport). As part of that plan he stated that after completion Javits would be demolished and the area put to other uses. We note that this project is tentative. Air Transport The chart below illustrates passenger traffic trends over the last 12 years for the three major airports servicing the Tristate area; the LaGuardia, John F. Kennedy and Newark International Airports.

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AAAAAAAAAAA OVERALL NEW YORK CITY MAJOR AIRPORT TRAVEL STATISTICS

Source: Port Authority of New York & New Jersey

As per the most recent information compiled by the Port Authority, the John F. Kennedy airport facilitated the greatest volume of travelers with approximately 53.25 million passengers, both domestic and international. It can be noticed that the John F. Kennedy and Newark International airport handle the majority of international flights but all three airports handle a fairly equal balance of domestic flights. Passenger traffic has consistently increased since slumping in 2009 at all three major airports. Tourism and Visitation Further adding to New York City’s tourism bottom line has been the continued influx of visitors, both foreign and domestic to the city. As depicted below, New York saw record numbers in 2014 and marks the fifth year in a row of constant increases in the number of visitors. The graph below serves to underscore the vitality and growth that New York City tourism has experienced since 2004.

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As can be seen from the chart above, New York City welcomed a record 56.4 million visitors in 2014, a new all-time high and a 3.9 percent increase over 2013. Visitors to the city generated an estimated $61.3 billion in economic impact to the city’s economy, another record according to the Mayor’s Office and NYC & Co. New York City continues to be the premier United States travel destination. In 2014, New York City welcomed an estimated 44.2 million domestic visitors and 12.2 million international visitors. In addition, 359,000 total NYC jobs were supported by visitor spending in 2014, and $3.7 billion in local tax revenue was generated as a result of travel and tourism. Average hotel occupancy also reached an all-time high in New York City in 2012, as average hotel occupancy reached 86.5%; however, significant increases in supply in recent years have dropped the city’s occupancy to 85.7% in 2014. In the tourism industry, average annual earnings were greater than $52,000 – roughly $7,000 more a year than average earnings in the entire local economy. According to NYC and Co., New York City is the most popular destination for international visitors in the United States. New York City has maintained its rank as the number one U.S.

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AAAAAAAAAAA destination for overseas travelers, as well as its status as the number one destination in tourism spending in the U.S. throughout 2014 and several years prior. The aforementioned demand generators are only the tip of the iceberg when considering the diverse supply of New York City demand generators for hotels. Not mentioned in detail are major attractions such as Central Park, Times Square, the Statue of Liberty, luxury shopping on 5th and Madison Avenues, Ellis Island, the New York Botanical Garden and the Empire State Building among many others. The World Trade Center site is one of the city’s newest and largest tourist attractions, attracting millions to the site annually. The City’s wealth of demand generators is what has established it as the number one tourist destination and will support a robust hotel market in the near and long term.

NEW YORK CITY LODGING MARKET As shown in the following graphs, demand for hotel rooms in the New York City area, following a decline in the recession, accelerated strongly in 2010 and has ranged in the 3.9 to 6.0 percent range for 2011 to 2014. Increasing impact from Airbnb and the ongoing ramifications of the strong dollar on international visitation and spending patterns resulted in a 2.9 percent growth in Q1 of 2015, the smallest increase in five quarters. This is expected to improve slightly in Q2 before accelerating in Q3 and Q4. (The following data reflect the overall NYC area).

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AAAAAAAAAAA Further, this strong demand occurred during a period in which the supply of rooms significantly increased as shown below.

From 2010 to 2014, New York City supply increased from 95,166 to 111,321, adding 16,156 rooms. In comparison, the current supply wave is anticipated to add 13,600 rooms over the next two years (2015/16) and 32,900 rooms over the next five years. While supply growth has been significant and is slated to continue at record levels for the next three to five years, the New York City market continues to absorb each year’s additions, effectively at market occupancy. With a 25 year running average of 77.6 percent market occupancy, the recent cycle’s sustained occupancy of 83 to 85 percent is anticipated to hold.

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Where the market is feeling the brunt of the pain is in on the rate side of the equation. Led by supply growth and exacerbated by the strong dollar and market disruptors, the rate growth “rug” is being partially pulled from under the market. Room rates grew steadily in 2010 and 2011 before declining below 3 percent for the past three years. Following the decline in 2001, the 2005 to 2007 period posted ADR growth ranging from 11 to 16 percent. While the U.S. lodging market is experiencing banner years, the New York City market continues to struggle with rate growth. We caveat these impacts with the following: •



The supply pipeline has been front loaded with limited service and select service projects with reduced complexity relative to full service and luxury properties, resulting in a lower weighted average for the market in initial years. This is anticipated to be offset as the openings of upper priced projects accelerates. The supply pipeline has historically focused on Manhattan. This is no longer the case, with significant development going into the outer Boroughs. This is also impacting ADR growth within the market via adjustments to the weighted average of the New York City supply.

The following presents the projected ADR levels going forward. We note that the market is projected to surpass the prior peak in 2017. New York is one of four markets within our Horizons platform that has not returned to pre-peak ADR levels (excluding adjustments for inflation). Factoring inflation, the market is approximately $70 below the peak of 2007/08.

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The following presents the resulting RevPAR. By year-end 2015, New York hotels are forecast to see a RevPAR increase of 0.1%. This is the result of an estimated zero change in occupancy and no change in average daily room rates (ADR). The 0.1% advance in New York RevPAR is less than the national projection of a 7.2% increase. Leading the way in 2015 RevPAR change is the lower-priced segment of New York. The properties in this category are forecast to attain a 4.3% gain in ADR, with no change in occupancy, resulting in a 4.3% RevPAR increase. Upper-priced hotels are projected to experience an ADR decline of 1.1%, along with a 0.1% gain in occupancy, resulting in a 1.0% RevPAR decline. Looking towards 2016, New York RevPAR is expected to grow 2.2%. This is better than the rate of growth in 2015. Prospects for RevPAR growth in the lower-priced segment (positive 2.8%) are better than in the upper-priced segment (positive 2.4%).

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As can be seen from the foregoing, while the New York City economy remained strong in 2014, rapid supply increases, a strengthening dollar, Airbnb, and other factors diluted RevPAR growth. This trend is projected to persist in 2015 and 2016. As the supply increases are absorbed, RevPAR is projected to accelerate in 2017 and 2018. PKF Hospitality Research has created an econometric forecasting model for the US and 60 individual markets that is updated quarterly. The most recent update for 2015 forecasts for the New York City area (including all five boroughs Westchester and Rockland counties) indicates that the full calendar year will experience: 2015 Changes o Supply increase of 4.1 percent o Demand increase of 4.1 percent o Occupancy decrease of 0.0 percentage points o ADR increase of 0.1 percent o RevPAR increase of 0.1 percent

PKF Consulting USA, a CBRE Company, is a long-standing member of GlobalHotelNetwork.com and GHN’s Investment Committee.

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