New York City remains among the top-performing lodging markets in the nation. Despite growth in supply across all five boroughs, demand increases continue to outpace inventory additions. Occupancy registered an increase for the ninth consecutive year following the dip caused by the Great Recession in 2009; as of year-end 2018, occupancy surpassed 87%. In addition to sustained occupancy levels, average rate (ADR) registered a rebound in 2018 following two years of decline. 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. Hotel operators largely attribute the 2018 ADR rebound to continued, steady economic growth. Changes to the U.S. tax law that took effect in early 2018 positively influenced corporate demand, while the city recorded a new peak in the number of leisure travelers that year. Growth in outer-borough industry, a record number of travelers to New York's airports, and strong convention activity also positively affected lodging performance. The initial months of 2019 recorded somewhat softer metrics, attributed partly to the government shutdown and related uncertainty, as well as the loss of compression from the Grammy Awards ceremony, which was held here in 2018 (hosted in Los Angeles in 2019).
The strong demand growth that has characterized the market over the past nine years is expected to continue, facilitated by further increases in supply; market-wide occupancy is anticipated to remain in the mid 80s. Large-scale developments in the Manhattan submarket continue to fuel demand. The resurgence of Downtown with the redevelopment of the World Trade Center complex and the continued development of the Hudson Yards complex in Midtown West are prominent examples of projects that should drive demand growth over the next three years and beyond; Hudson Yards reached a significant milestone in early 2019 with the opening of the Shops at Hudson Yards, which encompasses one million square feet and features over 100 retailers and 25 restaurants. 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. Finally, both John F. Kennedy International Airport and LaGuardia Airport continue to undergo significant overhauls to expand service capabilities and accommodate increases in flight service and demand.
New York City is expected to register another year of significant supply growth in 2019, with the inventory of rooms forecast to increase by about 6% on the heels of a 3% increase in 2018. The pace of supply growth is anticipated to taper off beginning in 2020. With strong occupancy levels and sustained demand strength, the new supply should be absorbed appropriately, albeit at a more modest pace than historically registered given the record-level increases. The expected balance between supply and demand growth should allow for continued ADR recovery and an upward trend in values to resume beyond 2019. Until that time, values are anticipated to remain fairly stable, as the market has been sheltered from value declines given investors' willingness to buy at lower cap rates. The transaction market has been characterized by a high proportion of foreign investment in recent years. This sector typically represents long-term investors willing to wait out the ADR downturn for the upside potential expected in the balance of the hold period. Furthermore, the city implemented a significant change in zoning in December 2018, which now requires developers to go through a special permitting process with the Department of Buildings to construct hotels within M-1 (manufacturing 1) zoning districts. These areas have been the focus of new hotel development in recent years, particularly for limited- and select-service hotels. The areas that have been most affected by this change include Midtown Manhattan's Garment District and Queens' Long Island City neighborhood. With these new restrictions in place, it is expected that developers will turn to more adaptive reuse projects; the longer timelines and greater complexity of these types of projects will likely slow the pipeline of new supply. Rising construction costs will also contribute to this trend.
Transaction activity in the New York City area nearly doubled in asset volume in 2018. Unsurprisingly, the largest volume transacted in Manhattan, with few sales registered in the outlying boroughs; as tracked by HVS, there were 20 sales recorded in Manhattan last year, compared to 11 in 2017. The top single-asset sale was The Plaza Hotel, which traded at approximately $2.1 million per room. While both parties to this transaction involved offshore entities, domestic companies accounted for the majority of buyers in 2018. 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 in the low single digits. 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. 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 and 2017. Overall, however, the outlook remains positive given New York City's intrinsically strong demand fundamentals and the expectations of longer-term upside potential.
