New York City Hotel Noses Ahead of Condo

In the early part of this decade, a weakened New York City hotel market—caused by a decrease in business and leisure travel after the Sept. 11, 2001, terrorist attacks and by a strong residential market—meant that Manhattan's inventory lost many hotel rooms. Large hotels like the Mayflower, Plaza and Delmonico were converted to residential condominiums.

The market has now made an almost 180-degree reversal. With hotel revenues in Manhattan continuing to surge and a condo market that is cooling off, some developers are looking more favorably at hotel development.

"We're seeing residential developers who had planned to build condominiums on a site come to us and ask how they can put a hotel on at least part of a site," said Mark Gordon, principal & managing director of Sonnenblick-Goldman Co.

In late September, Sonnenblick-Goldman arranged the sale of a former office building at 485 Fifth Ave. from Belfonti Capital Partners L.L.C. and The Carlyle Group to Global Hyatt Corp., for an undisclosed price. Belfonti and Carlyle bought the building, located in a prime neighborhood near The New York Public Library Mid-Manhattan branch, in 2005, with plans to convert it to luxury condos. Hyatt reportedly now plans to transform the property into a luxury suite hotel.

The lending community is also looking more favorably at straight hotel projects, said Mitchell Adelstein, president of CRG Realty Capital L.L.C.

In August, CRG Realty acted as advisor to boutique hotelier Thompson Hotels for $57.5 million in construction financing for Thompson LES, a 141-room luxury boutique hotel property on Manhattan's Lower East Side that is slated to open in late 2007. It was after Thompson raised the unit count from 110 to 141 and shelved plans for 40 condo-hotel units that Wells Fargo increased the size of its loan, comfortable that the Manhattan hotel market was strong enough to support a "hotel-only" project, Adelstein said.

Manhattan, with its high barrier to entry and low level of anticipated additions to hotel room supply, should see more residential-to-hotel switches, said Erik Warner, director for Ramsfield Hospitality Finance.

Savvy developers always buy and build developments with an eye toward changing market conditions, he noted. Ramsfield is under contract to partner with a developer to purchase a Midtown Manhattan apartment building that they initially considered a condo conversion opportunity. They are now planning a yet-to-be-determined mix of apartments and extended stay hotel units. Warner also said that he knows of at least two or three projects in Manhattan's condo pipeline that developers are considering switching to hotel.

"The New York hotel market is so strong," Warner said. "It has such a diverse demand base—everything from strong international travel to a businessman from Long Island who wants to hold an all-day (staff) meeting in Manhattan."

Nationally, CMBS investors are also having an impact, as they increasingly want more hotel loans to invest in. "In 2005, hotels were about 5 percent of CMBS pools," Adelstein said. "Year to date, the range is from 12 to 17 percent."