Manhattan's growning hotel market gets new complexion.

Over the past seven years, Manhattan's hotels have had one of the best streaks of high occupancy in anyone's memory. One would have to go back to World War II to witness the sustained level of occupancy we've seen over the last half-decade. For hoteliers, it was a harmonic convergence of huge commercial and corporate visitation, a tight convention schedule and the emergence of New York City as the nation's biggest urban tourist attraction.

New York hotel owners have had an amazing run of 80% plus occupancy starting in 1997, with 20 0 topping out at 83.3%, according to Smith Tray 1 Research. Most observers could argue that 83% represents an effective "fill" on an annual basis, akin to an office vacancy of 2%. During 2000, the City's entire complement of 72,000 hotel rooms sold out on t least 250 nights.

Occupancy notwithstanding, the real story in New York is RevPAR, which is the measure of revenue per occupied room, and is the best indicator of hotel dollar volume as it combines occupancy and average room rate. RevPAR increased a whopping 13.2% last year. Because of the dramatic number of Citywide fill nights, hotel managers were able to achieve the strongest room rates in New York history since demand certainly outstripped supply.

Unfortunately occupancy runs in cycles in New York. Over the past 25 years, occupancy usually rose for four or five years and then declined for a similar period. Much of this had to with the linkage of hotel visitation in Manhattan to the national economy. The sustained high recent occupancies broke the mold since we have not seen a dip in five years. Ho ever, it is important to keep in mind that the City's average occupancy trend over the past 15 years is closer to 77% than the 80% seen recently.

For the first time in quite a while, monthly occupancy trends have been down for the first quarter of 2001. The slowing of the national economy has caused cutbacks in corporate travel budgets, which is manifest in some pre-bookings for this year. A bearish stock market has also limited travel to the City. On top of this, the first quarter of 2001 ushered in terrible travel weather in the Northeast, which compounded the problem.

Most hoteliers in New York have resigned themselves to occupancies two to four points lower than 1999 and 2000, but are still counting on volume well in excess of that throughout the US. As one hotel manager put it, "We shouldn't complain because we are going from sublime occupancy to merely ridiculous levels. The real concern is rate." Although too early to tell, most operators are budgeting for occupancy drops against average rate increases in the 3% to 5% range -- healthy, but a far cry from last year's 8%.

With demand levels as strong as they are in New York, it is only natural that supply rises. New York went through a relative dearth of new hotel development in the 1990s as the City digested the supply increases of the late 1980s. Development is difficult in Manhattan, and many central hotel-style sites were eventually developed as residential or office, which are less risky propositions in the mind of most real estate investors. However, the sustained hotel market has prompted recent growth as 4,939 new rooms entered the market in 1999 and 2000, according to PricewaterhouseCoopers, with an additional 3,154 on the way.

An interesting characteristic of these new hotels is the complexion and location of the properties. Almost none of these are large corporate/convention properties, la the Marriott Marquis or New York Sheraton. With the exception of the Westin Hotel currently being developed by Tishman Hotels and the now W, former Planet Hollywood hotel, being developed by Starwood Hotels, virtually all properties are well under 500 rooms, with an average of 250. Furthermore, many of the new properties are not affiliated with the tried-and-true hotel companies, but are rather one-of-a-kind, "boutique" hotels, ready to offer a more stylized lodging experience for the guest. Many of these properties represent rehabs of former hotels, e.g. Ian Schrager's Hudson Hotel and Citylife's Thirty/Thirty.

An interesting byproduct of this recent development wave is that many new properties are located in areas that would have been unheard of for new hotel development 20 years ago. These include such far flung locales as the Hotel Giraffe on Park Avenue South, the new W Hotel on Union Square, the Bryant Park Hotel on 40th street and On the Avenue Hotel on the Upper West Side. This healthy trend has broken the Midtown/Upper East Side syndrome for out-of-town visitors, allowing for the exposure of different neighborhoods and the delivery of quality lodging accommodations to where the action is.

New supply additions always seem to occur in Manhattan just as occupancies are cycling down, and this new wave of supply is no exception. The difference between the new wave and that which occurred in the late 1980s is that Manhattan and its visitor fundamentals are much more strong and resilient to down cycles. Also, compared to the supply increases seen in many large US cities, New York's hotel room additions are modest, representing an increase of just over 10% for the three-year period ending December 2002. Most hotels in New York made money last year and will continue to do so in the foreseeable future, which is a testament to New York's unique position and attractiveness to business and leisure visitors worldwide.