While average rate growth has lagged and new supply continues to permeate the market, New York City remains among the top performing occupancy markets in the nation. Occupancy levels registered nearly 86% in 2016, a new peak after increasing year-over-year since the end of the Great Recession. New York continues to have one of the strongest economies in the U.S., driven by its reputation as a global center of corporate headquarters in finance and services, media, entertainment and telecommunications, manufacturing, and trade, as well as a healthy tourism industry. Nonetheless, average rates declined in 2016, resulting in a RevPAR decline of -1.9%. Monthly data for the fourth quarter of 2016 and the first quarter of 2017 illustrate a decelerating pace of ADR loss, with certain months even illustrating improvements over the prior year; this indicates that average rate is trending near the point of bottoming out, though average rates will likely continue to post stability to slight losses considering the robust supply pipeline.
We anticipate that the strong demand typical of New York City will likely persist, despite strong supply growth into 2019; occupancy is expected to remain in the mid-80% range. Large-scale developments in the Manhattan submarket continue to fuel strengthening demand. The resurgence of Downtown with the redevelopment of the World Trade Center complex, as well as the continued development of the Hudson Yards complex in Midtown West, are prominent examples of projects expected to drive demand growth over the next three years and beyond; furthermore, the expansion of the Javits Convention Center broke ground in early 2017. With an anticipated opening in 2021, the $1.5-billion project will add a 500,000-square-foot exhibition hall and feature the largest ballroom in the city. The project will also create hotel demand generated by the nearly 4,000 full-time jobs, 2,000 part-time jobs, and 3,100 construction jobs that the expansion will add to the local economy over its development and opening.
New York City is expected to register significant rises in supply over the next few years; annual supply increases are anticipated to hover around the 5% mark through 2019, with one of the densest pipelines in the nation. With historically dense hotel neighborhoods saturated with supply, developers have looked to new neighborhoods for hotel development opportunities. Thus, with more hotels in new submarkets, more discounted rates are currently being made available. Over time, as these locations become established, the need for discounts and the degree of the discounts offered are expected to diminish. With the improvement of rate and sustained demand strength, the new supply is anticipated to be absorbed appropriately, albeit at a more modest pace than historically registered given the record-level increases; this should allow for ADR recovery and an upward trend in values to resume beyond 2019. Until that time, values are expected to remain stable, as the market has been relatively sheltered from value declines given investors' willingness to buy at lower cap rates. The market has been characterized by a high proportion of foreign investment in recent years, which typically represents long-term investors willing to wait out the ADR downturn for the upside potential expected on the latter end of the hold period.
Transaction activity in New York City remained relatively strong in 2016, compared to 2015; unsurprisingly, the largest volume transacted in Manhattan, with few sales registered in the outlying boroughs. The top single-asset sale was the Andaz Fifth Avenue, which traded at approximately $1,170,000 per room. As mentioned previously, hotel values remained relatively steady, due in part to cap rates, which have held at near-record lows. Cap rates for high-performing limited- and select-service assets have hovered around the 5% mark, with capitalization rates on more upscale and luxury assets trending as low as 3%. As Manhattan is viewed as the nation’s top gateway city, hotel investors from all over the world consider it to be an essential and low-risk market for their portfolio. The pace of transaction activity is anticipated to moderate slightly in 2017; marketed inventory remains high, allowing investors to be more selective in their equity placement. Furthermore, REIT players in the market have shifted away from a strong sell strategy, having represented a substantial source of the seller pool in 2016. Overall, however, the outlook remains positive for New York given its intrinsically strong demand fundamentals and expectations of longer-term upside potential.