Square Feet | Checking In: How Long Can The Hotel Industry Stay In High Gear?

THE hotel industry has made a stellar comeback since bottoming out about five years ago, with occupancy and room rates rising sharply nationwide. Analysts expect another strong year in 2007, though they caution that the opening of hotels planned when the industry began its expansion may cool off the market.

Soon to open as a boutique hotel is the Hotel 373 Fifth Avenue.

What weve had the past three years were really exceptional levels of growth that we havent seen since the early 1980s, said Bjorn Hanson, a principal at PricewaterhouseCoopers, which tracks the hotel industry.

This year we may not see the increasing pricing power that we had in 2006, but its still a very impressive forecast, Mr. Hanson said. He predicted that revenue earned per hotel room would increase 5.9 percent this year, compared with about 8 percent annually from 2004 through 2006.

Revenue gains have been driven largely by rising room rates, which reached a national average of $97.35 a night from January to November 2006, up 7 percent from $90.95 in the comparable period of 2005, according to the most recent data from PricewaterhouseCoopers. In Manhattan, the average room rate climbed to $256.21 a night, also through November 2006, up 12.9 percent from $226.84 in the same period in 2005.

Consumer demand for hotels should stay robust in 2007, analysts say, as long as the economy and corporate profits remain strong. A weak dollar is also helping to attract foreign travelers, while prompting more Americans to travel domestically instead of abroad, they added.

But rising room rates may not be helping some luxury hotels. High pricing has caused some trading down, Mr. Hanson said, noting that, nationwide, some of the less expensive upscale brands like Courtyard by Marriott have managed to attract more guests. It isnt that the luxury segments lost business, he said. But due to large rate increases, they just didnt gain some of the business anticipated.

Some hotel analysts said they feared that pricing in New York City, in particular, where room rates soared almost 30 percent in 2005 and 2006, may begin to drive away some customers.

When you talk to meeting planners and business travel coordinators, there really is a perception out there that New York has gotten to be, in some cases, prohibitively expensive, said John A. Fox, a senior vice president at PKF Consulting, which specializes in hotels.

The lodging industry in New York City, though, has been remarkably resilient since 2001, when the market was weakened by the dot-com bust and the terrorist attacks of Sept. 11. Some hotels went out of business, while others converted to residential condominiums, taking an estimated 4,000 rooms off the market and leading to the run-up in room prices.

At the same time, high prices for land and surging construction costs have thwarted hotel development, making existing hotels more valuable, analysts added.

As a result, the pace of hotel sales has risen sharply. In 2002, I could count on one hand how many hotel sales there were in Manhattan, said Dan Fasulo, director of market analysis for Real Capital Analytics, which follows the commercial real estate market.

Last year, 19 hotels changed hands, representing about $2.9 billion in sales volume and more than 4,800 units, Mr. Fasulo said.

Istithmar Hotels, which is controlled by the royal family of Dubai, was the largest buyer of commercial real estate in Manhattan last year, with $2.1 billion worth of acquisitions, according to Real Capital Analytics. The transactions included the purchase of the 270-room W New York Union Square for $285 million and a 73 percent interest in the 248-room Mandarin Oriental, New York, said Istithmar, which put the Mandarins value at $340 million.

Nolan Hecht, director of the hospitality transactions group at Cushman & Wakefield, the commercial real estate brokerage firm, said the fast pace of sales should continue in 2007.

I expect even Manhattan hotel owners, who were typically long-term generational holders, to be tempted by the current valuations, which make it an overwhelmingly compelling time to liquidate, he said.

An estimated 3,500 hotel rooms are proposed for development in 2007 in New York City, about two-thirds of them in Manhattan, which has a total of about 65,000, Mr. Fox said.

Dean Schwanke, a senior vice president at the Urban Land Institute, said that conversions into condominiums had significantly reduced the number of full-service hotels, leaving the sector ripe for developers. There will be more full-service development planned for prime locations in 2007, he said.

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