As New York City hotels struggle to rebound from crushing losses during the pandemic, the New York State Legislature has enacted a series of measures aimed at making it easier for nonprofits to purchase struggling hotels for conversion into affordable multifamily units. Governor Kathy Hochul recently signed a bill exempting hotel conversion projects from a lengthy review process, which developers had blamed for the low number of applicants seeking access to a state program that funds adaptive reuse projects.
The new law lets hotels keep their certificates of occupancy (CO) if they switch to residential use, alleviating them from the need to acquire new COs. The bill makes it easier for Class B hotels inside or within 400 feet of residentially zoned districts to access funding from New York’s Housing Our Neighbors with Dignity Act (HONDA). The HONDA grant program was established last year, but the requirement of New York City’s Uniform Land Use Review process that hotel owners get new certificates of occupancy for conversions stymied grant applications. The HONDA grants are aimed at projects converting distressed hotels and office buildings into affordable housing owned and managed by nonprofits. HONDA requires half the units to be set aside for the homeless, while the other half will be subject to an 80% medium income cap for tenants. Rents can’t exceed 30% of a tenant’s income, according to the program requirements.
Hotels in Manhattan continue to trade for bargain-basement prices, as investors bet they’ll be able to turn a profit when tourism and business travel eventually resume at full strength in New York City. Apollo Global Management and investor Newbond Holdings announced a deal last month to buy the Hilton Times Square for $85 million, roughly 35% of the $243 million California-based REIT Sunstone Hotel Investors paid to acquire the 478-room hotel in 2006. Recent Manhattan hotel trades involving steep discounts include the Sheraton New York Times Square, which reportedly sold for half the price the owner paid when it was last acquired in 2006. MCR and Island Capital Group said they paid $373 million for the Sheraton.
CBRE recently raised its 2022 national forecast for hotel sector performance, citing better-than-expected fundamentals and below-average supply growth as well as strong domestic leisure travel. They are projecting that New York City hotel revenue for available room (RevPAR) will reach 2019 nominal levels by Q3 2022, moving up its previous forecast of Q3 2023 by an entire year. RevPAR exceeded the pre-pandemic average of $184 in December but then fell about 20% below the 2019 level during Q1 2022. CBRE now is also forecasting average daily room rate (ADR) growth of 29.7%, a 41.8% increase in demand and a 75.06% increase in RevPAR this year nationally. The company said ADR will once again exceed 2019 levels following a “pause” during Q1 2022, citing an anticipated recovery in inbound international travel, the resumption of more business travel, and higher inflation as drivers of higher hotel rates.
The New York City assessment roll for tax year 2021/22 (valuation date of January 5, 2021) showed a decrease in total market value for hotels citywide of 24.37%, compared to the prior year. On this year’s assessment roll (valuation date January 5, 2022), the total market value for hotels citywide is up 4.67%. In comparison, the total market value in the commercial class was down 17.42% in 2021/22 and up 9.73% in 2022/23, demonstrating hotels faring worse than the commercial class. Value for property tax purposes in New York City is derived from the income characteristics of the property, so an uptick in total hotel value in the future might be expected.
The experts at Ryan continue to monitor how these trends impact the hospitality industry and our clients. The local market experts at Ryan are uniquely positioned and available to help organizations understand the complexities of multiple tax jurisdictions and their different approaches to valuing and assessing hospitality property types.