By CIARA LONG
April 24, 2024
Roughly 16,000 New York City hotel rooms have been taken off the market to be used as shelters to house the migrants that have poured into the city over the past year. What comes next for those buildings when the migrant crisis ends is an open question.
Moelis & Co.’s Matthew Janukowicz, EOS Investors’ Sofie Issembert and the Hotel Association of New York City’s Vijay Dandapani onstage at Bisnow’s 2024 New York Hotel and Hospitality Conference.
“It was a very conscious decision whether to take migrant demand. In a lot of cases, it was great for near-term cash flow,” Moelis & Co. Managing Director Matthew Janukowicz said at Bisnow’s New York Hotel and Hospitality Conference last week.
“But then you juxtapose that with the capital that has to go in to be able to retain the asset,” he added. “I’ll be interested to see whether over the long term that was a good financial decision or not.”
Somewhere between 12,000 and 14,000 of the rooms used as migrant housing will eventually return to the market, but not without significant investment first, Hotel Association of New York City President and CEO Vijay Dandapani said at the event, held at Venue 42 by Convene at 5 Times Square.
“They’re going to need renovations,” Dandapani said. “It’s great news for construction people, but it’s not such great news if you’re a current hotel owner.”
Some investors jumped on the opportunity to nab contracts with the city to act as migrant shelters, especially when it was unclear how long the travel recovery from the pandemic would take.
“I worked with a client, a very small family office that knew nothing about hospitality, but bought a solid portfolio of hotels that already had migrant contracts,” LW Hospitality Advisors President and CEO Daniel Lesser said. “The cash flow was phenomenal.”
But that opportunity doesn’t come with a guaranteed happy ending for owners, Lesser warned.
“They knew nothing about hotels,” he said. “We gave them some advice as to what they could be faced with once the migrant contract is over.”
Investors and hotel owners may prefer hotel properties that haven’t served as shelters because those will come with the risk of more substantial repairs needed to bring it back up to standards that tourists are willing to pay for and brands are willing to associate with.
“To take one of the buildings where you really have to go in and do a deep dive into everything in the system is going to be expensive,” Hyatt Vice President of Development Rika Lisslo said, adding that some of those assets used as shelters now have structural issues requiring full property improvement plans. “When we’re looking from an existing hotel that might have been independent or another brand … that’s going to be a lot lighter.”
CitizenM’s Rani Gharbie onstage with Cullen and Dykman’s David Wilkes
The outlook for the operating hotels in the city is far brighter. Limited supply in the pipeline and a booming tourism market have meant hotels are now competing with office assets for investor dollars — and maybe winning, experts said.
“It’s not often the case that lodging is the darling asset class,” Newmark co-Head of Lodging Capital Markets Adam Etra said. “One of the things that we’re hearing from a number of investors, especially those private equity firms who are raising the next round right now: Their allocation to lodging on this next fund will be larger than it has been historically.”
Following the pandemic-era dip in visitor numbers, tourism in NYC is almost back to pre-pandemic levels. The city had 62.2 million visitors in 2023, reaching 93% of 2019’s levels, according to the city’s tourism marketing arm, NYC & Co. This year, that number is expected to rise to as many as 64.5 million tourists.
With the projected growth of domestic and international leisure travelers to the city, owners and would-be lenders are optimistic about the future of existing hotels because there will be less competition going forward.
The city’s 2021 zoning amendment that required special permits for hotel construction in the city resulted in hotel construction all but stalling in the years since. And last year, Local Law 18 took effect, removing the vast majority of short-term rentals from the market, a key source of competition in recent years.
Those two factors are already pushing prices higher for hotel rooms in the city, with industry figures at Bisnow’s event predicting prices will only continue upward as events like the 2026 FIFA World Cup contribute to consumer demand.
“You have supply basically stagnant and shrinking,” Etra said. “The future is extraordinarily bright for New York.”
EOS Investors’ Sofie Issembert, the Hotel Association of New York City’s Vijay Dandapani and Hyatt’s Rika Lisslo
Capital that was otherwise awaiting distressed assets may seek opportunities out in hotel properties instead, citizenM Managing Director for Investment and Development in the Americas Rani Gharbie said.
“It’s a huge amount of dry powder sitting on the sidelines that was meant to be deployed to buy distress, and we’re not really in a distress environment anymore,” he said. “There are a lot of companies out there that are looking for growth capital, and what is natural to happen is for that dry powder to be redirected.”
While hotels experienced the sharpest downturn four years ago when the pandemic took hold, they have had a stronger-than-expected recovery — in stark contrast to the office market, where prices are still falling and demand is in question.
“I don’t recall, ever, a time period where hotels were perceived as a more desirable asset class than office buildings,” Lesser said.
One potential cause for concern, however, is corporate travel. Remote work’s effect on office occupancy has had a parallel knock-on effect for hotels catering to business traveler, EOS Investors Head of Asset Management Sofie Issembert said.
“Work-from-home, Zoom, Teams meetings … it’s all made it way too easy not to have to travel as frequently for work,” she said. “That is the one subsegment that we’re really concerned about.”