Fueled by increasing tourism and business travel, the recovery in the lodging industry that began last year remains solid. Rooms are commanding ever-higher rates and occupancy is improving steadily, industry data shows.þþBut the industry is also benefiting from the fact that the number of hotel rooms is not keeping pace with demand. Relatively few new hotels are being developed, and hotels in some cities and resort areas are being partly or totally converted to other uses. Many metropolitan areas have actually been losing hotel rooms.þþThe national supply of hotel rooms has grown an average of 2.2 percent a year for the last 18 years, said Robert I. Bowers Jr., a senior vice president at Smith Travel Research of Henderson, Tenn. But so far this year, the inventory has increased by only half a percent. ÿWe haven't seen room supply growth this low since the early part of the 90's,ÿ he said.þþA dozen of the top 25 markets have lost hotel rooms in the last year, according to Smith Travel data for August. Some rooms have been taken off the market and converted into residential condominiums. In other cases, older hotels have been closed because they can no longer compete with newer rivals, or for renovation and upgrading or conversion into condo hotels, in which individual units are sold separately as second homes or investments.þþIn the Tampa area, some of the reduction can be attributed to the fallout from last year's hurricanes, Mr. Bowers said, adding that about 37,000 hotel rooms on the Gulf Coast have closed - at least temporarily - in the wake of Hurricane Katrina.þþThe trend of conversion to condominiums has been most pronounced in New York, where 15 hotels have pulled all or some of their rooms off the market. In all, 3,579 rooms have been taken out of service since 1999, according to figures supplied by PricewaterhouseCoopers.þþA New York City hotel room worth $1,500 a square foot could sell for as much as $2,500 a square foot as a residential unit, said Bjorn Hanson, who directs the firm's hospitality practice.þþIn the last two years, said John A. Fox, a senior vice president at PKF Consulting in New York, which specializes in the hotel industry, half of the rooms in hotels facing Central Park have gone off the market. The Mayflower, on Central Park West, was torn down and is to be replaced by condos.þþFourteen other hotels are being entirely or partly converted, including the Plaza, the Stanhope and, most recently, the Essex House, which will lose 15 percent of its hotel rooms. The newer hotels that have filled some of the gap have tended to be more modestly priced and situated either in downtown Manhattan, the Far West Side or in other boroughs.þþHotel owners in other cities where there is a strong market for luxury condos have begun to follow New York's lead. Plans were announced last summer to transform the Park Tower of the 1,300-room Wardman Park Marriott Hotel in Northwest Washington into residential units. In Los Angeles, the Related Companies, the owners of the 32-story St. Regis tower in Century City, have said they will demolish the tower and replace it with condos.þþBut in San Francisco, an attempt by the owners of the storied Fairmont Hotel on Nob Hill to remove 226 rooms from the market was recently thwarted after the hotel workers' union helped persuade the city to declare an 18-month moratorium on hotel conversions.þþÿA lot of other hotels were looking to do conversions,ÿ said Ian Lewis, a research analyst in San Francisco for Unite Here, which represents hotel, restaurant and apparel workers. ÿThe concern was that an en masse stampede would gut our city's ability to get large conventions and harm the largest industry, which is tourism.ÿ þþThomas E. Callahan, a co-chief executive of PKF Consulting who is based in San Francisco, said that with luxury hotel rooms in his city valued at roughly $300,000 a room and two-bedroom condos selling for $1.5 million or more, a developer would stand to profit handsomely by combining three rooms to create a condo unit even after spending $200,000 on renovations.þþBut he said not every hotel lent itself to conversion because the section transformed into condominiums needed to have separate elevators and higher ceilings.þþAfter plummeting in the wake of the economic downturn and the terrorist attacks of 2001, hotel values have been rising steadily to record levels, with prices so high that the initial rate of return, known as the capitalization rate, can be as low as 5 percent, said Thomas C. McConnell, a senior managing director at Cushman & Wakefield's hotel transaction group.þþIn two August transactions, the Westin Copley Place in Boston sold for $403 million, or $486,000 a room, and the Westin Century Plaza Hotel and Spa in Los Angeles changed hands for $293 million, or $402,000 a room. þþWith hotel prices increasing, the condo conversion craze is likely to be temporary, Mr. Callahan said.þþIn metropolitan areas like Miami and Honolulu on the island of Oahu, it is not conversion to residential condos that is affecting the supply but rather the proliferation of condo hotels, which remove rooms from the market at least some of the time. Rules vary as to whether owners are required to allow the units to be rented as hotel rooms when they are not using them. þþData on this trend is just beginning to emerge. Lodging Econometrics, a research and brokerage company in Portsmouth, N.H., has counted 108 hotels - both conversions and new projects - in which some or all of the rooms are sold as condo units. One Los Angeles lawyer, James R. Butler Jr., said he had been involved in 36 condo hotel projects around the country. þþOn Oahu, the number of available rooms was down 4.6 percent through the first eight months of this year, compared with the period last year, the biggest decline in any major market. At the same time, the occupancy rate on Oahu in August was a record 91.2 percent, according to Smith Travel. þþThe island's decreasing supply stems from the growing popularity of condo hotels, and, to a lesser extent, time-share units, said Joseph Toy, the president of Hospitality Advisors, a consulting firm in Honolulu.þþAccording to Mr. Toy, 2,900 hotel rooms were converted to condo units from 2000 to 2004, and 2,100 are expected by 2010, including the entire 1,150-room Ala Moana Hotel in Honolulu. In addition, Outrigger Hotels and Resorts is redeveloping a major portion of Waikiki and has taken 1,000 rooms off the market. Half will be converted to time-share units, Mr. Toy said. þþOwners of condo hotel units in Hawaii are not required to put them into the hotel's inventory, Mr. Toy said. About 10 percent of the condo hotel rooms on Oahu are withdrawn from the hotel market, a percentage that rises to 25 percent on other islands, he said. þþMost of the properties that have or will undergo conversion were in need of renovation that would not have occurred without the dollars provided by the sales of the individual units, Mr. Toy said.þþÿThe conversions are a double-edged sword,ÿ he said. ÿOn the one hand, there are less rooms when there is very high demand. On the other hand, most of these hotels have been budget and economy hotels that would not have been renovated.ÿþþ
Source: NY Times
