The Stoler Report - The hot hot hospitality industry in new York

♪ [Theme Music] ♪ MICHAEL STOLER: 54 million visitors to New York City. It may grow to 55, to 56 million. The hospitality industry is on fire or are we a little worried about the future? So, as opposed to me being my pessimist that I normally am, I've brought together four individuals who truly understand what's happening in the hospitality industry today. My guests include Will Obeid, who is the President and CEO of Gemini Hospitality, the owners of the Jade Hotel; Sean Hennessey, who is the President of Lodging Advisors; Tom Lydon, the President of the City Investment Fund, who are the owners of the Crown Plaza Times Square; and, last but not least, the guy who knows where to get the money, Ronnie Levine, who's the Managing Director of Meridian Capital Group. MICHAEL STOLER: A hotelier, an advisor, a fund operator and a hotelier and the money guy. Since you on a daily basis -- how is the hotel business doing? WILL OBEID: It's great. It's great. Our hotels are up substantially year-over-year now for the last four years. And we're looking forward to a very strong 2014. We have pulled back some of our projections for 2014 with all the supply coming online. But despite all the supply, which I think is going to be up about 6% in 2014 over `13, I think it's going to be a great year. MICHAEL STOLER: Supply 2014, your thoughts? SEAN HENNESSEY: Well, we're continuing to add rooms to the city, as Will said. Probably over the next two years we'll see about 11,000 new rooms opening up in New York. The good news is that over the past several years we've added thousands of rooms and the occupancy has actually gone up. We're starting to see it level off now a bit. The last couple of months... MICHAEL STOLER: 87% occupancy is the highest number that we've ever had on record, right? SEAN HENNESSEY: Yeah, I think there will continue to be strong demand. It will be more difficult to get a lot of pricing power. But we can generally always find the customer. MICHAEL STOLER: Talking about pricing power, this week it was recorded that the Standard Hotel in an area which 15 years ago Mr. Lydon and I wouldn't walk into that neighborhood, called the Meat Packing District, sold for $1.2 million a key. I mean, that is one of the highest numbers perhaps in New York ever. I think it exceeds what the Mandarin Oriental sold for a couple years ago. How can someone pay that type of price? What do they need to have in revenues per night to make that place profitable? SEAN HENNESSEY: Well, Ronnie's probably a better guy than me to answer that because the cost of capital is an important part of the equation. Certainly that hotel generates I would say somewhat superior revenues, given the cache of the Balazs brand, and it runs a very tight operating expense, such that it is well above average in terms of profitability. So the price per room, while it's still relatively high compared to historical trends, people could obviously get their arms around it. MICHAEL STOLER: How do you, when you're going out as an intermediary and these prices per key are going up all the time, get lenders to be interested? As you said prior to the show, you have banks, you have regular commercial banks and savings banks, you have the Wall Street conduits, the CMBS, you have insurance companies, and you have others. What's the appetite today for financing and hospitality? RONNIE LEVINE: Well I think on the going concern hotels where there's an in place cash flow that you're underwriting to, the per key exposure is really just one metric they're looking to. It's much more of a debt service coverage or a debt yield underwriting. So the debt yield, which is really just a cap rate to the loan amount, those have been compressing and coming down. Obviously, in turn meaning loan amounts are going up on hotels but there's still... MICHAEL STOLER: Let's be realistic. A hotel is a day-to-day operation. Every day at The Jade, your hotels, every day at the Crowne Plaza new people come in, the beds are made, there's another customer. It changes each and every day. There's no guaranteed revenue. There are 11,000 new rooms opening up. You had a hotel on 57th Street, maybe a year and a half ago there was a hotel called Park Central. Right now there were six more hotels or seven hotels right around the Park Central. What affect is that going to have? The stabilization isn't there. RONNIE LEVINE: Look, the lenders are trying not to underwrite to the top of the market occupancy. Hotels are generally more conservatively underwritten because of the factors that you've mentioned. I mean, they are a day-to-day business and you're really underwriting a business as opposed to real estate with long term stable cash flow. As compared to other asset classes, it's conservatively underwritten. But as compared to hotels a year ago, it's gotten significantly more aggressive. MICHAEL STOLER: Relating to my question that I just brought up to Ronnie and to the group, the Crowne Plaza Times Square is 850 rooms? TOM LYDON: Correct MICHAEL STOLER: Right now over the last I'd say two months, you have at least 2000 new rooms within a five block radius of your hotel. I know that many people, because I've been there, visited, want to go to a new hotel like The Jade. You may have updated your rooms, you may have done something over there but there is the new Quinn, there is a new hotel at the Park Central, there's the Viceroy, there's the Refinery, there's the combination Marriot... TOM LYDON: Courtyard and Residence Inn. MICHAEL STOLER: Right and then you have the Hilton Garden Inn. That's right into your market. That's taking away from your business. How do you keep your business over there in that market when you have 2500 new rooms? TOM LYDON: You have to adapt. You can't get in your mind that you're going to have a budget for an average daily rate of $350 and pretend if you have 2500 new keys competing that you're going to be able to hold that all the time. I think broader, you can't even take the competition -- whether this happens to be we're talking about hotels, but whether it's rental or condos -- I think the primary competition for our hotel has been all the new limited service hotels from 42nd Street on down to 23rd Street, what they call Midtown West I believe, on all side street type of buildings. They've had the fastest growth -- and I think Sean would echo this -- in market share and have also had the fastest growth in ABR. Now, even though they're running $50-70 behind a full service hotel, they tend to be much more profitable because they're non-union and they're not burdened by food and beverage. So even worse than the competition I think the biggest risk to New York City hotel business is the supply. Logic would tell you, you should stop building there but that's not the way the real estate business works. WILL OBEID: You know what else is a big threat to the hotel business? I was on the way over to the studio today going down the elevator in my building and there were some guys talking about where they stayed for their business trip. One of them is staying at a Four Point. The other one said yeah, I tried out AirBnB this time. I've seen a lot of indicators that AirBnB is continuing to make a lot of progress and I see that as a very large threat. MICHAEL STOLER: I'm happy you are bringing that up because I was about to. AirBnb is this internet site where people rent a room. About a week and a half ago I was out inspecting properties for New York Community Bank. I'm on 136th Street and Broadway and we walk into one apartment and it happened to be a very interesting apartment because it was just like a bowling alley type, so the bedrooms are over there. Right outside of each bedroom there were suitcases. I said to the banker, I said this is a rental apartment which is a hotel. There was this woman over there who opened the door for us and she was basically the proprietor. They were renting out rooms. WILL OBEID: Which is mostly illegal in New York City. MICHAEL STOLER: Correct, but that is another threat to the hotel market over here. WILL OBEID: And those type of services and sites are going to continue to get more sophisticated, more well-known and it's a very large threat to the hospitality industry in New York that has to pay all types of taxes and supports all kinds of services that they don't. MICHAEL STOLER: What about the suburban -- okay, let's leave Manhattan. We were talking over here. Maybe I have this crazy attitude towards Long Island City because I remember when there was nothing on Long Island City and now you have a number of apartment buildings and you have approximately 30 hotels. I don't see the limited service. People said your savings and low cost alternative out there. Do you see all these, can they all be successful on Long Island City? SEAN HENNESSEY: Certainly from an occupancy point of view they're trailing Manhattan by a few points, but they're not running 20%. Those hotels, I don't know the capitalization of them but if they acquired the land at the right price and kept the construction cost under control, there's no reason that they can't be successful. There's neighborhoods over there that are a lot hipper than you might give them credit for. MICHAEL STOLER: In Long Island City? SEAN HENNESSEY: Walk around some weekend, I think you'll be surprised. MICHAEL STOLER: How do the lenders today in the market look at Long Island City for financing? I would say it's probably, in my mind it would be much more difficult. It's not Brooklyn, which is hip, as one would say. RONNIE LEVINE: Yeah, I think for a construction financing for a new hotel project in that market, that's going to be very challenging. I don't think that that's a deal you're going to get really much interest in from a traditional bank. I think we've seen people go to alternative sources of capital, finance companies, funds and a lot of equity going into these deals. But, as I mentioned to you before, what we've seen a lot of people doing is really mixed use projects where there may be a retail component, a for sale condominium or rental component and then the hotel is just a smaller subset or a condominium interest within a larger project. To your point, it think in Long Island City that would be challenging to get done as a construction loan. MICHAEL STOLER: Mr. Lydon, you're a resident in New Jersey and you live in Hoboken, but in Jersey City there have been -- I believe they are breaking ground for two new hotels over there. How do you see the Jersey market? TOM LYDON: Actually on that waterfront locations I think they've done much better than people ever thought they would. The W Hotel was a pioneer for sure. You have something in Weehawken that's right out of ferry stop, a Sheraton Suites. I just had an occasion to have to make a reservation there for a family coming in for a wedding and it was on a weekend $350 for a view of Manhattan. I believe, I would say the current downtown hotels -- the Hyatt, the Westin -- I would think (I know that's where the Super Bowl teams stayed) -- that's not the reason they're doing well. I think they're generating very good revenues and are excellent properties. So it wouldn't shock me that new products can be built and can be successful in very specific locations and it's all transportation oriented. You've got to be able to get on that PATH right away to get into Manhattan. MICHAEL STOLER: That relates, you bring up the PATH and you bring up weekends. One of the busiest markets today -- and I said this recently on a show on the Broadway -- one of the markets that's really doing very well is visitors from around the world want to go to Lower Manhattan. That's a big site. You have major retail, enormous amounts of retail. Brookfield Place has 260,000 square feet of retail. The [INDISCERNIBLE] has 550,000 square feet of retail. Some major stores are going in there. Lower Manhattan is one of the biggest visitor sites over there. How's your view of Lower Manhattan today for the hospitality market? SEAN HENNESSEY: I think it's gaining a substantial amount of momentum. It's been a bit in a holding pattern with the office construction underway. You didn't really have the street level vibrancy. But with the Brookfield Place, with the completion of office towers downtown, with the redevelopment of the seaport there's a lot going on. MICHAEL STOLER: Right now, with the extension going that you can go from the path station underneath to Brookfield Place as opposed to going above there, I believe that and the office buildings are really moving there and Tribeca is becoming more of a neighborhood. You've been one of the visionaries originally -- the Javits Center, we all have our opinions of how bad it was, but they've gone through a major renovation. The Javits Center is really becoming more because of the Hudson Yards over there. How are you doing with your hotel near the Javits Center and how does everybody look at the Hudson Yards with regard to a new neighborhood and an area for hospitality? WILL OBEID: We have three Gem hotels in the City. One of them is near the Javits Center. We're very optimistic going forward. Over the last seven or eight years it's been difficult to see how the news of Javits Center has been up and down. I'm glad to see that it has a lot of momentum. I've seen some major conventions now move to Javits. For example, the ICSC have their big December event every year. They've now moved from Midtown to Javits, which is great. The whole Hudson Yards development seems to really be building momentum. We're very bullish on the Hudson Yards. We're also bullish on Lower Manhattan, specifically around the seaport area despite about... MICHAEL STOLER: We have Howard Hughes' organization putting billions of dollars over there in the seaport. The seaport is a beautiful section and I think that is a market. I think it's a distinct market of Lower Manhattan over there. There was talk about a convention hotel to be built near the Javits Center. What's the status on that? SEAN HENNESSEY: That's not planned as part of the... MICHAEL STOLER: Not in the Hudson Yards, but... SEAN HENNESSEY: There's a lot of interest in acquiring sites over there with the land costs and the available air rights have attracted people to the neighborhood. In my experience dealing with hotel companies for a long time, they kind of turn their nose up the further west you got. But now I'm working with a client and a couple of the major hotel companies are fighting over a site that a couple of years ago they wouldn't consider. So interest is there. MICHAEL STOLER: When you see the lenders, how do they look at the Hudson Yards of the far west side? RONNIE LEVINE: I don't think you can argue the viability. The amount of investment going on that area is staggering, between what Related and Oxford are doing, what Brookfield's doing. There's just so much money and infrastructure and momentum. I think once you hit the critical mass there you can't deny that that project is going to be successful and there's going to be significant office there, there's going to be residential and obviously hotel is going to need to be. SEAN HENNESSEY: I think once the subway extension opens that it's really going to put that into Midtown. MICHAEL STOLER: Yeah, but that's the Hudson Yards. When we talk about the west side, when the Inc was built -- do you remember they kept an Inc on 48th, the Inc 48 went bankrupt. Okay, maybe it was a combination of the recession, maybe it was a combination of the location over there. But locations, this city has increased its bounds. A couple of years ago when you were on my show and we spoke about the planned Marriott on 125th Street, which is now being replaced by the Continuum Company's residential tower and retail, there was no idea if a 500 room hotel in Harlem could absorb it. Now they have 108 rooms in Harlem and that's doing okay because there's business and there'll be additional because of the Columbia expansion. Do you see more hotels opening up in the suburbs or in the far sections of Brooklyn, Manhattan and Queens? SEAN HENNESSEY: Yeah, I think what we've seen over the past 5-6 years has been hotels expanding into very much non-traditional hotel neighborhoods. But as long as you scale the property and the amenities and the quality of the building that you're constructing to the neighborhood and the local demand, people have discovered there's no reason you can't be successful in neighborhoods. The old logic was you had to be near a lot of giant office towers. But people have made a go of it with other smaller neighborhoods. MICHAEL STOLER: I think the logic of the office towers is one logic but I think the real logic is the convenience of being near the subways or the trains. I think that's really -- especially that's been the fact in New Jersey in certain markets. TOM LYDON: Yeah, you take the location of the Inc property -- 10th Avenue and 48th Street -- there's no subway, there's very little employment over there -- although you've got to give credit to the auto dealers. They've done a fabulous job of upgrading every dealership -- that is not going to generate enough business for that type of folk. MICHAEL STOLER: A number of the dealerships specifically - John Catsimatidis has a property on the corner of 56th Street where he has a Lexus dealer and he's publicly announced that he's probably going to build an apartment tower. The other Lexus dealer on 57th Street, or the Honda, whatever it is, TF Cornerstone is planning a 1600 apartment building over there. Now, speaking of that, hip neighborhoods today -- Williamsburg, Bushwick, the Bronx -- the Bronx hadn't seen anything. The Opera House Hotel opens up in the Bronx. They're planning a hotel near Yankee Stadium over there. Simone Development just opened up a hotel in the Bronx, but that's tied in a little bit to Montefiore. Those are hotels for specific businesses aren't they, in certain cases? SEAN HENNESSEY: They're specific niches but, as I said before, you can get away with a hotel that caters to a niche business if it's designed and built correctly. WILL OBEID: Calibrated for the neighborhood. SEAN HENNESSEY: Exactly. WILL OBEID: Whenever we develop a hotel, the first thing we do is say okay, what's the context of the neighborhood and what's our version of contextual development because it's really about building the right hotel for that neighborhood so you can address the right market. MICHAEL STOLER: Here's an interesting question, especially for two hotel owners over here. How do people make a decision to go to the Crowne Plaza Times Square? Is it your management company, is it the name the Crowne Plaza or Times Square, those three components? Or is it also Expedia, Hotels.com and all the others? Why do people go -- how do you get people to visit your hotels? TOM LYDON: Will knows a lot more about it than I do, but the answer is that in our hotel we wish the Crowne Plaza name would generate more business from just the brand. That's the best way to do it is to have the brand drive the reason for people to say I want to stay at something I know and if I'm a Priority Club Member I can get some points and XYZ. If you don't have that, when you're running a large hotel of 850 rooms, a large food and beverage, a group business, then everything is really based upon how you segment who you're trying to attract. In this type of market it used to be you could, in our case of 850, rent half the rooms and then the week of you'd go and catch compression and be able to price your product and make good money. You can't do that today. You've got to get as many people forward committing and that means you have to deal with a lot of the intermediaries who are getting paid a 10-20% commission. WILL OBEID: That's exactly right, Tom, and we've seen over the last several years the booking window shrink dramatically which makes our job as operators that much more challenging because everyone's competing for those visitors to New York City. Now look, exchange rates have cooperated so we all have a lot of foreign visitors still coming to the City which is great. But we have to have a strong group sales and marketing team that we rely to book on probably about 30-40% of what we call our base business. Then we have an events team and a transient team and they're out there really catering to individuals in the transient crowd and booking as many of those rooms as we can. Of course, relationships with the so-called OTAs, the Online Travel Agents, it's incredibly important in today's day and age. You have to have the right relationships with the OTAs so that everyone out there can see you. That's from the Expedia, Hotels.com of the world right on through. Those can be some very expensive distribution channels. MICHAEL STOLER: But they keep your rooms busy. WILL OBEID: Yeah. The biggest challenge for hotel owners is controlling our own inventory and the better than we can control our own inventory and the cost of that inventory, the more profitable a hotel operation is. TOM LYDON: You may have 10-15 distribution channels, as Will just said, and you have to cut deals with each of them and then turn them on and turn them off depending on how hungry for business or you try to set it up so you're never hungry. MICHAEL STOLER: So here's an interesting question, Ronnie. I hear all of these matrixes or reasons of how a hotel operates and I know Sean does a lot of analysis. How does the traditional bank or lender look at this, because especially in a construction loan they're working in a vacuum? They're looking at Will's numbers on what his projections are and what it is. Fortunately, the projections that he may have made two years ago have exceeded because the world is getting better. How does a lender look at this? RONNIE LEVINE: Well I think on a hotel construction loan obviously it's totally pro forma based and you're basically doing the project on spec and you're utilizing a market study or data and comp set and you're trying to prove out a thesis on what the occupancy and rates this hotel's going to achieve and then whether it's going to be union or not union. You apply your expense ratios and you guesstimate a stabilized cash flow on the property. It's an art, not a science and I think that a lot of lenders are weary of underwriting to today's occupancy levels and today's rates to they're haircutting those rates. That's why I kind of when we talk financing I do think that the markets are being rather disciplined on construction financing. I don't think that that market is overheated. I think it's the better developers and the better sponsors that are getting bank debt, which is cheap. There's some recourse typically coming along with bank financing for construction loans on hotels. Then if you can't qualify for traditional bank debt from the major money center banks-- MICHAEL STOLER: [INDISCERNIBLE] high money lenders there. RONNIE LEVINE: --people are going out to, I prefer to call them, alternative sources of capital. Yes, the hard money community is actually, as you know very well, active in the hospitality space, especially on land loans. A lot of guys will start building for equity, they get stuck, they take a mezzanine loan to finish. The cost of the capitalization is very high. MICHAEL STOLER: You have my apples. I don't have them next to me. How does `14 and `15 look for the hospitality market, oh guru, Sean Hennessey? SEAN HENNESSEY: I think we'll see occupancy staying strong but it will probably ratchet down a point or two, still be approximate to 80%. And we'll see room rate growth in the 3, 4, 5% range, so slightly better than inflation but not nearly as high as the room rates we've seen in past cyclical recoveries where we've often seen double digits. MICHAEL STOLER: It's nice, the apple is shiny, not really glowing that much but it's not dull it sounds like--. SEAN HENNESSEY: I would also add that profitability's growing slower at a lot of properties, too. MICHAEL STOLER: So I'd like to thank the four of you for being here -- Will, Sean, Tom and Ronnie -- and I'll see you next week. ♪[Theme Music]♪