No signs of cooling in city's red hot hotel market.

The Manhattan lodging market experienced a period of prosperity during the first half of 2006. Hoteliers enjoyed the perfect convergence of a healthy domestic economy, limited new hotel guestroom inventory, a strong comeback in corporate travel and the favorable currency exchange rates of international travelers.

These factors created a thriving first half of 2006, with demand levels at an all-time high.

The first half of 2006 also saw a new push in health and fitness-related amenities. The flat-screen television and wireless internet craze of 2004 and 2005 has been widely implemented. The big brands--Westin, Marriott and Hilton--are now leading this charge into fitness. This amenity movement has included the offering of in-room exercise videos and equipment, the renovation and expansion of workout areas, and healthy dining menus.

The Westin Times Square has taken this trend further by retrofitting a portion of their guestroom inventory into "Westin Workout Rooms," where a treadmill is a permanent in-guestroom amenity. Demand for these rooms are extremely high, even at a significant average rate premium. With limited capital investment from hotel ownership, health can be a profitable and differentiating feature for hotels.

The extreme pullback in corporate travel to New York post Sept. 11 is over. During the first half of 2006 the corporate traveler came back in force. This has led to citywide sellouts during Monday to Thursday periods, resulting in overall occupancies in the high 80s. This unrivaled demand level has resulted in double-digit average daily rate (ADR) growth for the second consecutive year.

The real opportunity for the second half of 2006 will be in the group demand segment. Because this demand tends to book six-to-nine months in advance, the group rates generally lag the growth of transient business. Manhattan hoteliers have already started reducing the discounts on group rates. Hotels with significant meeting space should certainly be the beneficiaries of this strengthening of group ADR.

The 2006 development pipeline in Manhattan is relatively sparse. While numerous hotels are on the drawing board, most are small in nature. The rise in construction costs has made larger new-build hotels economically difficult to plan within the city limits. However, there has been a trend in the development of hotels in the outer boroughs, where land prices are more affordable. For the most part, the trend of hotel-to-residential conversion exhibited over the past two years has been played out. The obvious residential conversions have already occurred, coupled with a slight cooling in the residential sales market. In fact, several hotels that are currently for sale in New York, which would have been residential candidates a year ago, are being sold as hotels. The strength of the hotel market has led to sharp rises in hotel valuations, making residential conversions less economically attractive.

With overall citywide occupancies well into the mid 80s, and average rates growing at double-digit percentages, no other hotel market in the country is as currently robust as Manhattan. With a combination of the alarming rise in construction costs negating new-builds and the plethora of hotel-to-residential conversions witnessed in 2005 reducing guestroom inventory, the supply/demand curve has clearly shifted in favor of the current Manhattan hotel owner.

With these healthy fundamentals in place, the second half of 2006 appears to be as strong, if not stronger, than the first half.

BY NOLAN HECHT, DIRECTOR, CUSHMAN & WAKEFIELD HOTEL TRANSACTIONS GROUP