Growth of Mid-Price Hotel Properties in Manhattan (Business Travel News)
By Bob Andelman
What happens when mid-price American lodging chains go to Manhattan?
For one thing, they redefine the term “mid-price.” And for another, they give long-suffering, price-sensitive corporate travelers an option that their full-service cousins can’t beat.
At a time when new full-service hotels in Manhattan are few and far between, there is a continuing trend of hotel companies opening mid-price properties, many of which do not have restaurants, room service or other traditional amenities that full-service hotels provide. Companies including Marriott, Hilton, Cendant and InterContinental have recently opened or announced plans to open limited service hotels in the near future. What they lack in amenities, they make up in price, convenience, brand familiarity to suburban-based travelers and, in many cases, free high-speed Internet access.
“We’re seeing a lot more limited service brands coming into the city and with multiple locations, such as Hilton Garden Inn, Holiday Inn Express and Courtyard By Marriott,” says Kirk Reed, manager of the New York Hospitality and Leisure Practice at PricewaterhouseCoopers, LLP. “There are more limited service hotels in the New York City pipeline than there have been in years. It’s part of an indication of the expansion of the limited service upscale segment and midscale segment. Travelers are accustomed to staying at these hotels when they travel. They’re used to not having full business services and room service. And in Manhattan, room service is less an issue because restaurants are always nearby.”
Among the newly opened:
• Holiday Inn Express Midtown-Fifth Avenue, opened in October;
• Hilton Garden Inn Times Square, which was a conversion from a full service hotel, reopened in October;
• Hampton Inn Herald Square, opened in 2005;
• Hampton Inn Manhattan/Seaport – Financial District, opened in December.
• Residence Inn by Marriott – 357 suites West 39th Street & Avenue of the Americas, opened late 2005.
And those coming later in 2006:
• Courtyard By Marriott on East 92nd Street;
• Courtyard by Marriott Harlem;
• Hilton Garden Inn Tribeca;
• Holiday Inn Express Brooklyn;
• Holiday Inn Express, West 29th Street;
• Wingate Inn LaGuardia, Queens;
• Wingate Inn, West 35th Street;
• Four Points by Sheraton SoHo Village;
• Hampton Inn Battery Park;
• Hampton Inn SoHo.
“Hampton has been around over 20 years,” says Phil Cordell, senior vice president of brand management for Hampton Inns and Suites. “We’re a brand that always prides itself on listening to guest feedback, including where we’re located. For 10 years, New York City – Manhattan proper – has been on top of the list of where guests wanted to stay with Hampton but we didn’t have a location. How far can the brand stretch? We’re in downtown Chicago, Dallas and Atlanta. But many of our hotels are roadside and in tertiary markets. And we knew New York was a challenging market for development because of costs. It’s not as easy as saying today, ‘We want to be in New York City next year, let’s do it!’”
The first Hampton property in Manhattan opened two years ago; there are now three, with a couple more coming in the next 18 months.
The new mid-price hotels don’t need the big footprint that full-service hotels do, leading to some interesting locations and designs. In Chelsea, the new Hampton has 160 rooms, but there are only eight rooms to a floor. It’s the smallest site the brand has ever built on. And in Times Square, the new Holiday Inn Express likewise is squeezed in between two other buildings, 33 feet wide and 22 stories high. It has just five rooms per floor.
The mid-price brands have a lower per room labor cost than the full-service chains, “which is important in a city such as New York, which has high labor costs to begin with,” Reed says.
Brand loyalty is another driving factor. Business and leisure travelers around the country recognize that Hampton means free high-speed Internet access or that a Hilton Garden Inn means a free continental breakfast. And both typically offer new construction, an attraction in and of itself.
And while they might be used to paying $89 a night in St. Petersburg, Florida, for a mid-price brand, there is no sticker shock paying $199 a night in Manhattan, because “mid-price” is relative.
“It’s much higher than those products typically can charge in smaller towns and suburban markets,” according to John Fox, senior vice president in charge of PKF Consulting’s New York office. “The fact a Hampton or Hilton Garden Inn can get such a high rate in New York makes those products viable. One of the reasons consumers are willing to pay is because the Hilton is $300 or more a night. And in 2005, it looks like New York City’s occupancy rate was 86 percent. To run that high, we had to be effectively sold out for 250 nights last year. While those Hampton travelers might not be happy about paying $175 to $200, comparatively speaking, it’s still a bargain. It’s not a Sheraton or Hilton, but it’s a new Hampton Inn! They’ve done a phenomenal job with all the little stuff.”
That’s Cordell’s view as well.
“Our challenge sometimes, as branders and marketers, is what price do consumers attach to our product?” he says. “But we know with Hampton that as long as there is value in price, the loyalty is there. That makes more sense in a place like New York. If you think about the big full price hotels there, you paid, even in bad times, $300, even $400 a night in season. Then you went to the hotel restaurant and paid $20 for continental breakfast, $1 for telephone calls and $10 for Internet access. When a Hampton comes into Manhattan, yes, you pay $180 per room. But we throw in a free breakfast, including a hot item. For two people, that could save $50. Then we throw in free local calls and a free Internet connection. If you compare that to full-service, you could be saving $100 or more with us.”
Won’t a mid-price operator like Hampton risk cutting into the corporate business traditionally done by its big brother, Hilton?
“I would probably be not telling the truth if I didn’t say, ‘A little bit,’” Cordell says. “We have the Waldorf, we have the Doubletrees. We may have taken a few guests from some of those, but they’re much more likely to have jumped out of the Hilton family. They might have been quoted $400 at the hotel and said, ‘No thanks,’ and jumped to mid-price Brand X. As our segment overall moves into Manhattan, it creates a mindset that, ‘Ooh, we have a choice that we didn’t have before.’”
The high occupancy in-town owes some credit to the overall flatness of the market; new units are coming online, but so far only in equal number to what’s been lost to higher real estate uses
“Residential prices in the city have risen significantly,” Reed says. “That has affected lodging in several ways. Some prime properties around Central Park, for example, have converted from hotel to condominium. The increased real estate prices have caused competition for sites. Corner and other prime locations have to compete with residential developments that are more profitable right now. There are a number of hotel developers that would love to build large, full-service in the city. But with residential prices averaging above $1,000 per square foot, it’s difficult for them to do it.”
As a result, hotel developers are pursuing smaller sites, mid-block locations and sites outside of the traditional core area of 42nd Street and north. New, mid-price hotel development is moving into areas such as Chelsea, the far West Side, downtown, and the outer boroughs, particularly Queens and Brooklyn.
How will the mid-price group affect the negotiating climate between corporate travel buyers and hotels?
“It will help to some extent with the availability of relatively lower rate hotel rooms,” Reed says. “’Relatively,’ because the new limited service hotels are still expected to have ADR above $200 on average. But with occupancy about 85 percent, there is rate pressure in the city. We expect for ‘06 that rates will increase 10 percent citywide after a three percent increase in ‘05. Because of high occupancy and a large number of sellout nights, there is still upwards pressure.”
Will the hotel chains – and corporate travelers – eventually regret the lower visibility, off-the-beaten track sites they’re being pushed into today?
“No,” Reed says. “The hotels are able to market themselves more effectively now because of Internet sites and being able to put photos and maps on the Web. Travelers coming to New York are accustomed to staying in smaller, lower service locations that might not be large prominent locations or in the traditional geographic areas.”
Another motivation driving the growth of the mid-price category: Manhattan needs hotel rooms like Mars needs women.
PricewaterhouseCoopers estimated flat growth in hotel room inventory for 2005 after Manhattan actually lost 1,220 rooms in ‘04; citywide the decline was 360 rooms.
“But in 2006,” Reed says, “there have been just over 2,000 new hotel rooms announced in terms of openings and no hotel closings announced yet. If the recent trend of conversions slows or stops, there will be more room availability in Manhattan and citywide.”
Holiday Inn Express, which entered the market in October, will be part of the coming room rush.
“There are plans to develop another Holiday Inn Express in Manhattan further down 29th Street,” says Verchele Wiggins Mills, vice president of brand management for Holiday Inn Express Hotels, which is a part of InterContinental Hotels Group. “There is also one in the pipeline for Brooklyn. Customer trends indicate that the majority of the growth is going to come from consumers that are more price conscious. In Manhattan, you’re utilizing the room to sleep, get breakfast and move on. It’s a viable strategy the developers have picked up on. And given our competitive situation, we’re where our competitors are. It’s a natural progression, wanting to be in urban markets so our loyal traveler has that option.”
Can there ever be too many brands and too many choices in the Big Apple?
“There haven’t been many developed in some time and there’s a need,” Fox says. “I was sitting at a hotel bar recently talking with someone about brand proliferation and segmenting. He pointed up and said, ‘Look up there. There are eight kinds of vodka! Trust me, there’s enough business to go around.’”