Lodging market ends 2001 on a strong note.

Following last year's triple punch of a cooling market, the addition of a moderate amount of supply and the catastrophic events of Sept. 11, New York has proven its strength and resiliency during the first several weeks of 2002, and has reaffirmed its position as the nation's strongest lodging market.

Following a virtual freeze in air travel and visitation to New York City in the last quarter of 2001 -- which significantly impacted hotel bottom lines well through the December holiday season -- business and leisure travel has begun to steadily increase since the beginning of this year. This is largely due to growing traveler and consumer confidence, companies in downtown Manhattan and throughout the city getting back to business, and a rebounding national economy. As a result, current hotel performance data is starting to reflect a return to pre-2000 levels for the aggregate New York lodging market.

The New York City lodging market ended 2001 with an overall occupancy of 73% and average daily rate of $192 -- far short of the remarkable numbers achieved in 2000, when city occupancies hovered well above 80% and average rates were over $220. New York City lost well in excess of $1 billion in guestroom revenue last year compared to 2000. It bears mentioning, however, that the level of occupancy and room rates exhibited by New York properties in 2001, which was the worst in ten years, would still be the envy of most major U.S. hotel markets.

Smith Travel Research data shows year-to-date occupancy through March 9, down only 3.8% over last year, and the gap is closing week by week. Local general managers confirm the existence of significant pent-up demand from leisure travelers who initially postponed their travel post-Sept. 11. Although occupancy has begun to rebound nicely, visitor booking patterns are producing shorter lead-times, and as a result area hotels have not been able to implement strong yield maintenance tactics.

This limits the ability to grow average rates, which are down 10% for the year-to-date period. As occupancy levels in the city reach an increased level of stabilization and hotel managers become more confidant, average daily rates will start to rebound, albeit at a slower pace when compared to occupancy.

Particularly bolstering local hotel performance are the various national media campaigns appealing to tourists to return to New York City -- including some targeted at tri-state area residents. These efforts have reaped tangible rewards, perhaps most notably the resurgence of Broadway theaters, which have made headlines for filling seats in recent weeks.

The current improving trends in hotel performance show how far New York has come since Sept. 11 and the final weeks of 2001, when hotels trying to fill rooms resorted to cutting deals with displaced office tenants for temporary space. There was also quite a bit of talk in the market during this period related to the conversion of hotels to residential uses, but this strategy seems to have lost some wind during 2002 as occupancy has strengthened.

In terms of local investment, hotel transactions in Manhattan slowed considerably in 2001, as the financial success of 2000 and the unprecedented 2001 decline combined to render underwriting extremely difficult.

The bid-ask spread proved large, with sellers seeking to reap the good fortunes of 2000 and buyers looking to acquire assets on a declining income basis. The only significant transactions during 2001 were the Barbizon, Righa Royal and Delmonico hotels, although the latter will ultimately be converted to residential use.

With limited new supply on the books for 2002 and 2003, the near-term outlook for New York City's lodging market is favorable. Local hotels continue to benefit from the city's unshaken position at the epicenter of finance and tourism --and remain a vital component of the vibrant local economy. Investors seem to agree, as a tremendous amount of domestic and foreign equity targeting New York hotels has made itself manifest of late, although product availability continues to be low. More hotels may be offered for sale over the next year as certain properties become financially stressed or are foreclosed upon, although this is not expected to be widespread.

The evidence of rebuilding following the attack on the World Trade Center is substantial -- the Marriott World Financial Center has reopened, the downtown Embassy. Suites is expected to return in May, the Ritz Carlton Battery Park and W Times Square have opened, and the 800-room Westin Times Square is expected to be completed ahead of schedule.

While business may not be back to "normal" yet -- and will not be for some time -- one thing is clear: New York will continue to be the largest engine for visitation in North America. The coming year will be one of uncertainty, but the investment market realizes that during the medium term, hotels will continue to be a favored asset class in Manhattan.