New York City sits on an island 23 square miles in area and people from all around the world want to come and live, work and play on it. Using these three verbs - live, work and play - as a jumping off point to talk about real estate values, I would like to examine the residential, commercial and hospitality (hotel) real estate sectors in New York City, and try to identify those with the strongest value growth prospects for investors. In short, as I will show in this article the hospitality market remains the most supply constrained of the above three. In this article I will present the figures that support such a claim, and different ways that investors can play such a theory.
When dealing in any business, before moving forward to specific details, we must first examine the basic fundamentals in supply and demand. In real estate we can fairly accurately identify the supply in all of the above sectors, but identifying the demand in sectors besides residential (where population functions as the demand) can prove quite tricky. With that said, the following table represents the consensus opinion for supply and demand for the above sectors:
Hotel (for all five boroughs)
1. 578,518 (rental)
2. 183,036 (owner)
50mm tourists/visitors per year
All of these markets clearly have healthy demand with office space running 133 square feet per worker and apartments running a little over 2.02 people per unit, but I think the hotel space remains the most heavily under supplied. Assuming an even distribution of tourists throughout the year, NYC will have 137,000 visitors per day, with only 90,000 rooms to service them! While I could make a valid argument one way or the next on office and residential for an under supplied market, I think the hotel market's under supply comes through crystal clear. If you have on average 137,000 visitors per day, with only 90,000 rooms available, you have a supply problem.
How to Play This Theory
Unfortunately, no REIT currently only plays the NYC hotel market, so if you buy my theory you will have to get creative. When investing in hotels you can either buy an operator - Marriott (MAR), Starwood (HOT), Hyatt (H) etc. - who for the most part provide services for hotel operators, or you can buy a landlord who actually owns the buildings. Investing in one of the large operators listed above will not get you sufficient exposure to the New York City hotel market because they have such a large global reach their actual exposure to the New York City hotel market becomes diluted. Therefore, I think investing in one of the hotel REITs offers investors the easiest way to capitalize on this theory.
NYC Hotel REITs
Unfortunately no hotel REIT exists that gives you pure exposure to the NYC hotel market. As such we have to evaluate the REITs out there, and see which ones offer investors the most exposure.
The following lists the top hotel REITs with their NYC exposure listed.
- Pebblebrook Hotel Trust (PEB) - 32.50%
- Hersha Hospitality Trust (HT) - 19.14%
- LaSalle Hotel Properties (LHO) - 12.75%
- DiamondRock Hospitality Company (DRH) - 11.65%
PEB owns 49% of its NYC hotel portfolio, which brings its share of the NYC market down to 16%, but still puts it squarely in the top of hotel REITs.
Without going into too many particulars in this article I think that Hersha Hospitality offers investors the best way to invest in NYC hotels. Besides that it has the highest percentage of its portfolio in Manhattan, its hotels span the range of all the different hotel segments. It has a presence in select service, full service, boutique, luxury and extended stay segments, a feature not found in any of the other hotel REITs listed above.
Hersha has lost money for the past four consecutive years, making a limited focus on its NYC portfolio somewhat myopic. However, in this article I just wanted to bring to your attention a possibility to play the NYC hotel market through a REIT, but any investor must account for other more general issues with any company.
Some will argue with my theory, and point out that NYC has added, and continues to add a lot of hotels rooms, which will increase the supply and blunt the constraint in the market. Specifically, in the two previous decades the average annual increase net inventory was a mere 1.1%. Contrast that with the year-over-year net gains in 2008 vs. 2007 -- +2.7%, 2009 vs 2008 +5.8%, 2010 vs 2009 5.0%, and 2010 vs 2011 5%.
I disagree with this because NYC has made a major effort to bring visitors in on two fronts. Firstly, tourism -- NYC administrations have made a major push to increase tourism, which has increased ~33% in the past decade, far outstripping supply. Secondly, NYC has made a major push to diversify its economy away from the financial services industry. The two most prominent examples of this effort -- the Tech Campus currently under construction on Roosevelt Island, and the increased media presence in the city. By the city diversifying itself away from financial services (but not eliminating it, of course) the city ensures that it will see a steady flow of not only tourists, but steady increases in the business traveler segment as well.
SL Green (SLG) provides investors with a REIT that only traffics in the NYC office market, but no such entity exists within the residential and hospitality spaces. As such, any approach in either of these areas will not give investors a real solid way to play that specific market. In this article I hope I brought to your attention ways to play in this exciting space, and hopefully see long-term growth.