Simply put, it was a choice between fully closing or taking in non-traditional guests with a guaranteed revenue stream.
Owners of New York City hotels struggled to capture any demand during the pandemic and the recovery that followed. Along with other major urban markets, New York City’s hotels have been slow to regain occupancy at pre-pandemic levels, so many owners turned to an alternate use to help weather the period of low demand.
As of October, 140 hotels across New York City are temporarily or permanently closed and no longer open to travelers. Instead of taking in guests, they have been hosting migrants and the unhoused.
“Everything boils down to economics,” said Dan Lesser, president and CEO of New York-based LW Hospitality Advisors. “For many [hotel] owners, it makes sense to have a somewhat guaranteed stream of income. It’s every single night 100% occupancy.”
Hotel owners and operators did not respond to requests for comment. City officials also did not respond to requests for additional information.
Highest and Best Use
The nightly rate the city pays to these hotels may not be the highest that the market could generate, but it’s steady revenue at full occupancy. Lesser said he’s heard the standard rate these New York City hotels are charging is $190 a night, and some rates are higher.
The Roosevelt Hotel, a property that’s become synonymous with the migrant housing program, was closed prior to opening to migrants. The hotel has been the subject of redevelopment speculation for a long time, and many thought that post-pandemic it would be ripe for repositioning.
Instead, it turned from a closed hotel with no income into a property with a multimillion-dollar contract with the city to house migrants, Lesser said.
“Well, guess what? That means kick the can down the road for any potential redevelopment play,” he said.
Had it not been torn down earlier this year, the Hotel Pennsylvania could have been used for migrant housing, Lesser said. It might have been a compelling story for an older, physically and functionally obsolete hotel that reached the end of its economic life to take advantage of current market conditions to reach 100% occupancy at decent rates, he said.
The properties that have these city contracts are a mix of larger, older hotels and some are select-service hotels, Lesser said. Many are branded, but some are independent.
“I really haven’t seen luxury hotels participate in that phenomenon as most likely the economics just don’t make sense,” he said.
Impact on the Market
Many of the hotel owners involved have more than one participating property, and when the hotels return to traditional use, the most cost-effective approach would be to do so in unison, said Sean Hennessey, CEO of Lodging Advisors and clinical associate professor at the Jonathan M. Tisch Center of Hospitality at NYU.
These hotel owners are generally waiting to see where the market is headed, Hennessey said. Most watching the market expect the new regulations on short-term rentals in the city would restrict the number of rental units available to travelers, cutting back on overall available supply. That could lead to an increase in hotel average daily rates over time as room demand grows against supply.
While new hotels will open in the city, the development pipeline has decreased so much that there won't be many, creating an environment for improved revenues and profitability, Hennessey said. It will be a relatively long time before the economics improve to the point where new hotels under new regulations are financially feasible and likely to be developed.
“Right now everyone's sitting tight a little bit to see how it's going to play out, particularly with the economy being a little more wobbly than we might like at this point in the cycle,” he said.
Having all of these hotels out of the market’s overall supply has reduced the available room count, Lesser said. Between the new short-term rental regulations and migrant contracts, the New York City hotel market overall is getting close to 90% occupancy, which is the threshold for compression conditions when owners have more pricing power.
“That puts tremendous pricing power in the hands of owners and operators, and that’s why during compression nights you see select-service hotels charging room rates of $600, $700, $800 a night,” he said. “It’s all a supply-and-demand equation.”
Brand, Management Relationships
Many hotel owners plan to return their hotels to traditional use, but there’s some tension with the hotel brands and management companies they work with, Hennessey said. The owners needed to generate revenue during the pandemic-induced downturn, but they have agreements with brands and management companies to run these as hotels at certain standards.
“The owners’ efforts to deviate from that agreement has resulted in a couple of the management companies having significant disputes with the owners as to what the best path forward would be,” he said.
Many have found a way to work through this together, however, so most of this is happening behind the scenes, Hennessey said. The hotel companies involved want some benefit or cut of the economics in the downturn, so much of it may be negotiating posture so they’re not giving anything away for free.
“They have some guardrails up to make sure that even if it’s sub-optimal or not what they originally contracted for, they can create a contractual amendment that has a specific period and a specified compensatory element to it,” he said.
Future of Migrant Hotels
It’s all speculation at this point, but there’s probably going to be significant migrant housing at hotels until the end of 2025 and into 2026, Hennessey said. That’s largely because New York City is not a market where new apartments can pop up quickly or easily. The city recently created a migrant shelter and facility that looks like an airplane hangar at Floyd Bennett Field in Brooklyn.
“It’s not really what anyone wants, but the recognition is that in a market like New York where the land use and economics are so intense, it’s going to be very, very difficult to find lots of or create housing that will resolve this situation any time soon,” Hennessey said.
New York City’s right-to-shelter laws make it an attractive destination for a lot of people, and it doesn’t look like many migrants are planning to move to other locations, he said.
“I’d be really surprised if this is all old news in a year from now or even a year and a half at that,” he said.
When owners do want to transition back to normal hotel use, the hotels they leased as housing will require a meaningful amount of work, Hennessey said. To start, the rooms generally have a higher level of multiple occupancy than normal because the city is trying to house as many as people as possible.
On top of that, these rooms are being used more on a daily basis, he said. A hotel guest in the city generally only stays in the room overnight, heading out in the morning for tourist activities or business meetings.
Migrants living in the hotels are generally prohibited from working, Hennessey said. They may leave their rooms to meet with government officials or other short-term activities, but they’re in the rooms for longer periods of time each day.
“I suspect you will see when they come back into transient use, you’ll have more expenses, such as repainting the walls, freshening up the rooms in addition to refinishing existing furniture that’s in the rooms or bringing back any furniture that was put into storage,” he said.
It’s an interesting opportunity for New York City's hotel market, Lesser said. During the depths of the pandemic, hotels couldn’t give rooms away, and now it’s the opposite. Now these hotel owners will have to decide how to handle the transition back to traditional hotel use and factor in the physical requirements to do so.
They entered this situation figuring out the highest and best use, knowing there would be extra wear and tear on the rooms, he said. They’ll make a similar economic decision when figuring out the future of their properties.
So far, Lesser said he hasn’t heard of any hotel owners who are planning to convert their properties to more permanent housing solutions for the city, “but anything's possible.”