What's Protecting the Manhattan Hotel Market From Totally Imploding?

Room occupancy in Manhattan remains the highest in the country — an average of 81.6 percent last year, according to PKF Consulting, says NYT.

The occupancy remains high, though, because of major room rate discounting. Revenue per average room, the standard industry measure, declined 25.8 percent, to $196.18, from $264.41 It is a bigger discount than anywhere else in the country.

Because of large fixed costs in the hotel industry, falling room rates destroy net-income quickly.

NYT again:

A dozen New York City hotels have defaulted on their loans or are in foreclosure, receivership or bankruptcy, according to Real Capital Analytics, a research firm. Among these were the W Hotel on Union Square, the Four Seasons on 57th Street between Madison and Park Avenues, and the Time Hotel on 49th Street between Broadway and Eighth Avenues.

And the picture for the rest of the industry isn't pretty either:

Bradley Burwell, a senior associate at CB Richard Ellis, the giant brokerage, estimated that at least half the hotel mortgages in New York were in technical default, meaning that the properties were not generating enough cash flow to maintain the debt service reserve agreed to in their loan documents.

The only thing stopping the entire Manhattan hotel industry from imploding is the current low rates:

What has saved many owners from actually defaulting is that most are pegged to the London interbank offered rate, or Libor, which remains very low. “That’s essentially free money that people have today,” Mr. Burwell said. “It’s saving a lot of deals from going into default.”

What happens to the industry as rates start to climb is anybody's guess. Interest rate payments based on Libor are really not much different from having aa adjustable rate mortgage on a house. Will rates climb because of Treasury crowding out? This could be disastrous for Manhattan's hotel industry. Or will rates climb as a result of Fed induced inflation, which will give the industry some room to hike rates?

Bottom line: Betting on the Manhattan hotel industry right now is a roll of the dice.