Hotel CEO: Time for 'extreme' caution in New York

A veteran hotel investor this morning told Wall Street analysts that it's time to exercise "extreme" caution in the New York hotel market, which remains the most expensive in the USA but is also experiencing a hotel building boom.

"Our viewpoint on New York is extreme cautiousness," Pebblebrook Hotel Trust CEO Jon Bortz told analysts on the company's third-quarter earnings call. "It's due primarily to the supply side — not the demand side."

The publicly traded real estate investment trust, based in Bethesda, Md., owns 25 hotels in 16 markets, including New York. Prior to forming this company, Bortz had formed LaSalle Hotel Properties in 1998 and led it until 2009.

New York's average room rate for the last month is about $301, or 6% more than the same period in 2011, according to hotel industry tracker Smith Travel Research's latest report. No other city comes close to achieving that rate. In second place: San Francisco/San Mateo, Calif., with an average daily rate of $210, or 12% more than a year ago, STR says.

"New York has changed"

Bortz told analysts:

"We've seen very significant supply growth in the market. New York has changed. There are a lot of sub-markets in New York that have opened up due to less crime, whether that's lower Manhattan, the downtown market or the West Side — which is probably the most active area from a development perspective, including with hotels.

"The barriers to entry that pre-existed are not quite the same as they were, and not as high as they were before. ... We just spent about a week with a team going through every construction site in New York, and our estimate is that we'll see 4% supply growth.

"That's 4% the way (hotel industry data tracker) Smith Travel talks about it, so you probably have a few more openings (to come). The more troublesome is the 7% to 8% growth we see in 2014. That is based on hotels under construction — not proposed.

"I think there are some folks who need to understand what's going on in New York from a pending perspective. This is a lot of supply that's coming into this market," Bortz said.

Less-expensive hotels coming to the Big Apple

Additionally, the type of hotels under construction have the potential to influence hotel rates, he said.

"We are seeing a lot of select-service hotels," he told analysts on the call. "That totally depresses the ability to raise rates in the market and increases the risk."

The latest hotel deal to be announced: USA TODAY's Hotel Check-In on Wednesday broke the story that Holiday Inn-parent InterContinental Hotels Group has inked a deal to build the flagship location of its fitness-themed Even Hotel brand on the east side of Midtown Manhattan. The hotel will occupy 23 stories of a 35-story newly built tower at 219 E. 44th St. near Grand Central Station.

"It seems that every brand feels a need to debut or have representation in New York," says hotel consultant Mike Yochim, who worked for Wyndham for 20 years and helped the company open Manhattan hotels. "It's like the old saying, 'If you can make it in New York, you can make it anywhere.'"

Global hotel brands that don't have locations in the U.S. today are scouting for locations in the city, he says.

London-based, ultra-luxury Dorchester Collection, for instance, is looking to add a hotel in the city.

Hong Kong-based Langham Hotels recently announced its first hotel in New York, but the news won't add any rooms. Why? Langham's taking over an existing hotel - Setai Fifth Avenue hotel.

Other global chains are looking to add more properties, because they say demand justifies growth.

Spanish hip-hotel chain Room Mate, for instance, is currently looking for a second location, Room Mate CEO Kike Sarasola told me last week in Barcelona. The company currently operates Room Mate Grace at 125 West 45th Street.

For now Yochim notes, hotels in the city are doing "quite well" as STR figures suggest, however, revenue per available room and average daily rate "don't seem to be growing as quickly as the supply."

For Bortz's part, he still is a big believer in the most popular part of the city, where Pebblebrook has a stake in six mostly Midtown hotels such as the Affinia Manhattan Hotel.

"We still believe that it's a great long-term market to own in Midtown," he told analysts.

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