With Oversupply and Falling Room Rates, the Last Thing the Hotel Biz Needs Is a Travel Ban
President Donald Trump’s travel ban issued late last month might have come at the worst possible moment for an industry that is already struggling to keep its head above water: New York’s hotel business.
Long before Trump’s Jan. 27 executive order that read to many travelers around the world like a big “No Vacancy” sign (though it’s legally blocked as of publication time), the industry had been plagued by problems including an oversupply of rooms, the growing presence of Airbnb, looming foreclosures and a transformation of existing hotels into something entirely different—like, say, homeless shelters.
This has many in the industry worried.
“As one of America’s longest standing hospitality associations, the Hotel Association of New York City strongly supports an open, transparent and welcoming visa policy for visitors of all backgrounds to the United States,” said Vijay Dandapani, the president of the Hotels Association of NYC, in a statement. “Not only is New York City America’s front door for many international visitors, our own economy critically depends on a robust and thriving tourism industry that supports tens of thousands of good jobs.”
But the travel ban is only part of the problem. Perhaps most critical is the 15,333 rooms under construction in New York City, according to data from STR, a source of hotel data benchmarking. That will be tacked onto the existing 115,369 hotel rooms in the city.
“People have to be very, very aware of this,” said Jan D. Freitag, the senior vice president of lodging insights at STR. “It will impact the performance of the market going forward. If room demand stays the same and we’re adding 15,000 rooms over the next two years or so, occupancy will decline.”
If all of the new rooms were to open tomorrow, that would represent a 13 percent increase in room supply. Divide that by two years, that’s a 6.5 percent increase in the number of rooms per year. The U.S. annual average, by comparison, is 2 percent, Freitag said.
Those include St. James Hotel at 109 West 45th Street, W New York Union Square at 201 Park Avenue South and Gowanus Inn & Yard at 645 Union Street in Brooklyn. In addition there are those that are in financial peril. Gallivant Times Square at 234 West 48th Street, formerly known as TRYP New York Times Square by Wyndham, is in foreclosure, as are Mansfield Hotel at 12 West 44th Street and Shoreham Hotel at 33 West 55th Street.
Banks are not lending on hotels in New York City, according to Sam Suzuki of Suzuki Capital, which in part advises and raises capital for hotel operators. “They want to see the absorption take place,” he said. “What lenders are looking for is those rooms to be absorbed and a stabilization of occupancy.”
And already existing hotels are starting to feel the pinch.
When Robert MacKay was growing up in Elmhurst, Queens, in the 1970s, the best local hotel—and the only one of 12 he and his family would recommend—was Pan American Hotel. Dubbed “New York City’s Most Convenient Hotel,” the Queens Boulevard lodging was known for hosting the Santa Claus volunteers from the Salvation Army every December, MacKay said.
“It also attracted U.S. Open tennis fans, United Nations representatives, Shea Stadium people and so on,” said MacKay, the director of public relations, marketing and tourism for Queens Economic Development Corporation. “In the 1990s, the hotel hosted live salsa music on weekends. This was also the heyday of Colombian immigration to Jackson Heights. So the place was packed all the time with fantastic dancing and outfits.”
Since the middle of 2014, however, Pan American Hotel, like scores of other New York City hotels since, has been operating as a homeless shelter.
In an effort to make ends meet, some hotels are taking contracts with the city to house homeless people. At the beginning of last year, there were 508 hotel rooms being occupied by homeless families with minor children, according to The New York Times citing data from the city’s Department of Homeless Services. That number increased to 2,418 rooms on Nov. 30, 2016. And as of the end of last year, the Times said the city planned to add to the count by up to 436 rooms for families without minors, plus another 100 for homeless individuals.
A spokesman for DHS suggested that the hotels were just a temporary situation for the agency.
“Hotels are being used as a bridge while we increase shelter capacity citywide through a borough-based approach that keeps homeless New Yorkers in their communities—close to their existing jobs, schools, services and support systems,” he said via email.
But for hotel owners located near hotels-turned-homeless shelters, it’s another matter.
“I think that is really bad for hotel owners,” said Chan, whose Flatiron Hotel is two blocks away from MAve Hotel at 62 Madison Avenue, which is housing the homeless.
Of course, not everybody is gloomy about the future of the hospitality business in New York City.
“Despite an unprecedented surge of new hotel construction, demand has increased at a faster pace and occupancy levels have increased,” said Sean Hennessey, the chief executive officer of hotel consultancy Lodging Advisors. “In fact, demand has increased at an even greater rate when you consider there was a surge in Airbnb rooms in New York City at the same time as the surge in new hotel rooms.”
But Airbnb raises another area of concern for hoteliers. While there are conflicting reports on the impact of Airbnb on the hospitality industry (with its legal and illegal apartment renting business), there is no doubt the company is shaking up the business.
“Airbnb hasn’t demonstrably lowered hotel occupancy levels, but I believe it has aggravated the challenges hoteliers have faced in raising prices,” Hennessey said.
In New York City, the Average Daily Rate, or ADR, was down 2.5 percent at $259.14 in 2016 compared with the year prior, STR data indicate, while occupancy was up 0.7 percent to 85.9 percent.
Steven Kamali, the founder of food and beverage advisory firm Hospitality House, said Airbnb and the oversupply of rooms have—and will continue—to put pressure on rates.
Chan said that without Airbnb, revenues would increase by at least 10 percent. “Hotels would regain their short-term monopoly,” he added.
Where hospitality boosters and Airbnb share a common cause is in opposing the administration’s travel ban on seven predominantly Muslim countries (in place for a week before a federal judge blocked it). Airbnb provided barely veiled criticism of the ban in its Super Bowl advertisement this past Sunday.
Hotel Association of New York City is invested in fighting against illegal hotels. And New York City’s official destination marketing organization NYC & Company has denounced the ban “because of the image it creates globally and the way people look at the United States,” said Christopher Heywood, a spokesman for the organization. “Certainly New York City has the greatest to lose—we have 30 percent market share of all overseas travel to the U.S. Any change in travel policies will not only fly in the face of our values—we are a city of immigrants—it creates an image problem. And that could potentially impact travel decisions.”
Boutique hotel developer Morris Moinian, the president of Fortuna Realty Group, said if the travel ban would be implemented again it would not affect “lifestyle-driven, boutique properties,” like his, “but larger hotels [in the] 500- to 1,000-rooms [range] will ultimately be impacted.”
Since the number of tourists from the countries targeted in Trump’s ban is generally small—around 23,000 of the 60 million visitors in 2015—Freitag said he doesn’t believe “that number moves the needle” in terms of impact on hotel stays. But, he warned that “the travel industry has to be very mindful that the perception that the executive orders out of the White House could be that the U.S. is not open for business and that could have a negative impact.”
In fact, he said last week—while the travel ban was still in effect—that business at his 11 New York City hotels was better than in 2016 at the same time. On the homeless issue, he said hotels becoming shelters presents greater opportunity for him. His perspective on the oversupply was equally as cheery: He noted that while there is a large supply of rooms coming online, there are some big hotels with rooms leaving the supply chain, like the Waldorf Astoria. Removing even high-end keys from the supply will force tourists to stay in lower-end hotels, Chang said, like his.
“Worried? I’m not,” Chang said. “For me, I’m building a hotel at 30 percent lower cost than anybody else in the city, so even if the hotel market is off by 20 percent, I can still survive. I am not concerned at all.”