City's hotel market revels in new-found prosperity.

After what experts consider the worst five years of the hotel market, New York City's hospitality industry is finally rebounding from the effects of 9/ 11.

The sector ended 2005 with an occupancy rate of 85%, a 4% increase from 2004.

"During peak periods in New York, you can't get a hotel room and when you can, it's a very pricy proposition," said Daniel Lesser, senior managing director of Hospitality & Gaming at CB Richard Ellis. "Average rates are increasing significantly above inflation."

Speaking at a recent hospitality panel at an Association of Real Estate Women luncheon, Bjorn Hanson, global leader of Hospitality & Leisure at PricewaterhouseCoopers, said rates have increased by 15% and revenue is up about 19%, with hotels seeing an average rate of $220 per night. This is the first increase in average rates the sector has seen since 2000, when the average rate was $215. According to Hanson, this figure is about $35 behind what it should be.

The main reason for the strengthening of the hospitality sector is a lack of inventory on the market. While there are 2,000 rooms currently under construction, and another 4,000 planned, the industry has lost 3,700 rooms to residential conversions since 1999. This trend has become especially apparent over the past two years because of the booming residential market. In 2004, 550 rooms were converted to residential, nearly doubling to 970 in 2005.

In the past few weeks, Madison Equities announced that it will build a 500 room hotel in the 50s at Eighth Avenue. This is the first large scale hotel to be built in the city in ten years. At the same time, however, Host Marriot has sold its Drake Hotel to Macklowe Properties, which is rumored to be planning to tear it down to make room for a residential building. The Mark Hotel at 76tb Street and Madison is also coming off the market.

According to Lesser, the city is in desperate need of more hotel units. He believes that what is especially needed is a headquarter hotel adjacent to the Javits Convention Center. New York is the only major city that doesn't have a hotel connected to a convention center. Lesser said, 'We won't see something like that happening for at least five years because of lead time."

Pamela Malkani, partner at Millenium Partners, agrees that a large scale, conventional hotel is needed at the Javits Center. "You can get to Javits from midtown in minutes," she told attendees of the AREW luncheon. "The west side is more gentrified. It's right for a hotel. The neighborhood is safe and there are activities around the location."

In the short term, this lack of inventory will continue to have a positive effect on the rebounding industry, as existing hotel owners and operators now have the pricing power to dramatically raise rates to what they should normally be. However, this will have some very negative problems in the long-term.

"All of these issues do not bode well in the long term for attracting groups to New York. A large scale convention hotel has been talked about for years. But that's just it, it's just been talked about," Lesser said. "The problem is that it will get tougher and tougher to attract groups and conventions to New York." He added that right now the city continues to benefit from a robust U.S. economy, especially corporate travel and tourism.

As prices continue to rise, the suburban market is dramatically benefiting from the spillover from Manhattan. Travelers will often stay in a suburban location, such as airport hotels in Queens and New Jersey, as well as suburban hotels in Westchester and Long Island, when the city hotels are sold out. As these locations become more popular, even if they find themselves in a position of pricing power, there will still be a big price point difference compared to Manhattan rates.

Hotel developers are being forced to think creatively, with several new trends coming forward lately, as not only large plots of land are unavailable, but construction costs continue to rise. One of these trends is the boutique hotel.

Jason Pomeranc, partner of the Pomeranc Group, which lately has been focusing on boutique hotels, said, "[We] never build new. Today, [it's not affordable] to build in New York City. The price per key is much higher."

He added that with boutique hotels, no area of the city is off limits. A hotel with a smaller number of units, typically between 80 and 100, tends to feed off the atmosphere of the local neighborhood in which it exists. Lesser noted that there are a number of smaller hotels in various stages of development throughout the city.

Another trend that's been popping up all over the country is condo-hotels. Developers find this to be a good way to finance hotels. The traditional condo-hotel sells rooms to investors who then put their unit into a rental pool. These hotels tend to be smaller in terms of number of units.

Pomeranc noted that the explosion of these hotels has yet to be seen in New York as they have in other parts of the country, such as Miami. Lesser, though, has heard talk of some possibly being developed in Lower Manhattan. And Hanson agrees that no doubt the trend is coming to Manhattan.

Fractional hotels are also another possibility for financing hotels in Manhattan. According to Karen Rubin, vice president of development, feasibility, investment analysis for Starwood Hotels and Resorts Worldwide, who also spoke at the AREW luncheon, the timeshare industry is going through a renaissance.

Though timeshares are typically seen in resort areas, such as Mexico, Aspen and the Caribbean, they could make their way to Manhattan. Rubin calls the "urban timeshare" a "mostly elusive beast." She said that Starwood plans to convert a couple of floors at the St. Regis Hotel to fractional, because unlike condo-hotels, fractional does not have to depend on superior economics to be successful.

There's a high risk in timeshares, though, Hanson said. In 2005, 35% of the purchase price was spent on marketing, with only 29% of the customer base purchasing a timeshare. He noted that in the short-term, it could be very profitable.

"I haven't really seen fractionals done in New York," Lesser said. "Starwood is very much at the cutting edge of doing unique things in the lodging industry. If anyone is able to pull it off, I could see they'd be able to. But still, it hasn't been done yet and it's somewhat unproven."

Malkani maintains that fractional hotels could be successful in Manhattan. "If the hotel business needs anything today, it's fractional," she said. "You need a 24/7 city with equal culture and business. The dynamics of the city have to be perfect." Millenium Partners reserved nine floors of its Phillips Club to fractional. Today it currently yields $2,000 per s/f, making up 15% of the hotel's business.