HENDERSONVILLE, Tennessee—Why is average-daily-rate growth in New York City lagging when occupancy and demand growth are strong?
That is the question under debate by hoteliers and analysts alike as
New York City continues to experience ADR growth below the market’s
long-term annual average.
New York City is unquestionably one of the world’s most vibrant,
dynamic and diverse hotel markets. Major hotel companies value presence
in the market to grow brand recognition and customer awareness. In
addition, independent hotels often compete more rigorously with branded
properties in major markets like New York City, particularly with the
ability to leverage Internet marketing and online-travel-agency
presence.
New York City is consistently one of the world’s highest occupancy
markets, even in periods of significant room supply growth. However,
over the past three years, New York City has failed to produce ADR
growth consistent with the market’s long-term annual average of +3.7%.
So that leads us back to our original point: Why?
Data deep dive
Before we attempt to provide insight, it is important to take a look
at New York City’s supply/demand fundamentals and operating performance.
Even considering the market’s high supply increases, supply/demand
fundamentals are strong. Full-year 2014 room supply growth spiked to
5.5%, but demand (rooms sold) grew even faster at 6%, pushing occupancy
up 0.4% to 84.8%—the highest annual occupancy STR
has ever recorded for the New York, New York, market. (STR is the
parent company of Hotel News Now.) ADR increased 1.8% to $263.45, and
revenue per available room moved ahead 2.3% to $223.46.
First-quarter 2015 market performance was predictably down as prior
year comparisons were difficult (Super Bowl in 2014 and large convention
shift). Inclement weather in the Northeast also slowed travel in the
early months of 2015. RevPAR was down 4.3% in the quarter on declines in
both occupancy and ADR.
The good news: Occupancy increases returned in February and March
after declining in January. The bad news: ADR declined in each of the
first three months of 2015.
Luxury chains led all chain-affiliated segments with full-year 2014
ADR up 3.8%. All other chain-affiliated segments experienced ADR growth
of less than 1% or ADR declines. Independent ADR growth was basically on
par with luxury chains at 3.7%. All chain-scale segments—including
independents—experienced ADR declines in the first quarter of 2015.
Three of STR’s five New York metropolitan submarkets—Lower Manhattan,
Times Square and Uptown/Midtown East—account for roughly 90% of the
market’s annual rooms revenue and about 80% of room supply. The
Uptown/Midtown East submarket posted the best 2014 performance of the
three submarkets with ADR up 3.3%, while Times Square and Lower
Manhattan ADR grew less than 2%. First-quarter 2015 RevPAR declined in
all three submarkets, driven primarily by ADR declines in each of the
three areas.
In an HNN blog earlier this year,
Jan Freitag, STR’s senior VP for strategic development, offered a
number of potential factors contributing to the slow recovery of New
York City ADR, including:
- increased room supply growth;
- increased mix of select-service supply;
- strength in the U.S. dollar;
- brand loyalty programs;
- OTAs;
- rentals by owner; and
- heavy union presence.
All of these factors, and probably more, have likely contributed to
the market’s slow ADR recovery. So what are the biggest constraints to
ADR growth in the market?
Topping our list is room supply growth. A lot of new supply has and
will continue to come online in New York City, and that knowledge
influences business decisions at the hotel level. Historically, ADR
often (though not always) has shown constrained growth or declines in
times of accelerated room supply growth.
The slow recovery of upper-upscale ADR has been the biggest drag on total market ADR recovery.
This segment remains $33 below its ADR peak reached in September 2008
and accounts for nearly one-quarter of market room supply. Even though
upper-upscale room supply share has declined, the segment is the largest
chain-affiliated group in the New York, New York, market.
Slow upper-upscale ADR recovery is primarily due to the lack of transient ADR growth.
Prior to the downturn of 2008-2009, the transient ADR premium over
group at upper-upscale chain hotels averaged about $40. Today, group and
transient ADR are basically equal. At the same time, transient demand
growth has been strong, and group demand rebounded sharply in 2014.
Business decisions at the hotel level are obviously at the core of the ADR conundrum.
At the market level, supply/demand fundamentals and high absolute
occupancy levels seem to support better ADR growth. For reasons best
known by hotel operators in the market, these supporting factors are not
translating into the kind of ADR growth that might be expected.
Strategically, representation in the New York City market is a must
for global hotel brands. Near term, look for a continuation of current
trends. STR expects New York City supply growth to peak in 2015 and
continue at more than 5% in 2016. The current forecast also calls for
occupancy declines in 2015 and 2016, with below-trend ADR growth. Longer
term, STR expects lower supply increases after 2016 and a return to
near-trend ADR growth.
