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As seen in
March 30, 2003
Commercial Real Estate/ Fallout from War
Hotel Use Declines; Office Sector Faces Uncertainty
by JOHN HOLUSHA
The war in Iraq is hurting the hotel industry in the New York
metropolitan region, as airlines scale back their flight schedules
and the threat of terrorist attacks makes people reluctant to
visit the region, real estate executives say.
The effect on the office leasing and investment sales markets
is not as easy to measure. Some executives say uncertainty about
the conflict's duration and economic effects is causing companies
to put off making decisions to buy or lease. Others, though,
say it is a good time for bargain shopping, particularly for
tenants who want to lock in a good deal.
Bookings at hotels started to drop even before the war broke
out, said Thomas P. McConnell, senior managing director of the
hotel group at Insignia/ESG, the brokerage and services company.
"The impact on travel took hold at the beginning of the year,"
he said, with hotel revenues down 5 to 10 percent from last
year's level. "A lot of people blamed it on the weather, but
a lot of travel was curtailed in anticipation of the war."
Hotels, he noted, are the most vulnerable of real estate sectors
to shifts in public moods, because rooms are rented on a night-to-night
basis. "Lodging is the most likely to be affected," Mr. McConnell
said. "It is the first to go up and the first to go down."
Nicholas Buss, vice president of research for PNC Real Estate
Finance Group, said: "The hotel sector is most at risk. It has
been reeling since 9/11, and if travel continues to decline,
we could see some distressed hotel owners."
The war is likely to delay, but probably not prevent, an expected
upturn in occupancy rates and revenues, said Daniel H. Lesser,
managing director of the hospitality industry group at Cushman
& Wakefield, another major brokerage and services company. He
said hotels have adjusted their marketing strategies to appeal
to domestic travelers rather than the international tourists
that previously sustained the local industry.
"The fly-to markets are softer than the drive-to markets, so
hotels are reorienting toward the drive-to markets," he said.
"In New York, hotels are marketing to people who live within
500 miles of the city, rather than the international travelers,
who are not coming anyway."
He said the industry has been depressed for so long that a cyclical
recovery can be expected. "It is not a matter of if, but when,"
he said. But, he conceded, the war could push back the time
of the recovery.
"If we have a quick war and do not experience a terrorist attack,
there will not be much impact on the industry in New York,"
he said, noting that outside investors are still interested
in buying hotels in the city.
Nationally, PricewaterhouseCoopers, the accounting and consulting
company, said a brief war - defined as one lasting 30 to 45
days - would depress hotel revenues during the first half of
this year, with normal growth resuming in the second half. Under
this chain of events, the revenue per available room, a standard
industry measurement, would increase only 0.5 percent in the
first half of the year, compared with what had been anticipated
as a growth of 2.1 percent. A war lasting more than a month
and a half, however, would reduce first half revenues to 0.1
percent and shrink them 3.6 percent in the second half, according
to the study.
In other sectors of the market, the economic uncertainties produced
by the war are seen as an opportunity for the determined to
lock in deals when landlords are willing to make concessions
to fill office space.
Quoting a saying that she attributed to an early Rothschild,
"Buy when there is blood in the streets," Ruth Colp-Haber, a
partner in Wharton Property Advisors, a tenants' broker, said,
"There are good deals out there, and now is the time to lock
in good long-term leases."
She said some of the best deals are to be found in sublease
space that was expensively built out for dot-com and telecommunications
companies and then returned to the market. "They can be complicated
deals, but they are among the best available," she said. "The
space is built and the phones are installed, so a tenant can
move in two weeks rather than waiting nine months if you are
starting with raw space."
Michael T. Cohen, the president of the GVA Williams brokerage
and services company, said he was more concerned with national
economic policies that might push up interest rates than with
fallout from the war. The war, he said, has been used as an
excuse to postpone decisions.
"It is easy to blame the war in Iraq for the inability to make
a decision," he said. "But unless there is a protracted war
or a loss, it will not push the economy into a recession. The
real recession threat is unbalanced budgets in Washington that
will crowd out the private sector in financial markets."
This, he said, would tend to drive up interest rates to the
detriment of the economy and the real estate industry.
James Meiskin, the president of Plymouth
Partners, a brokerage that represents tenants, said he is among
the bargain hunters. "I'm seeing things move forward as tenants
drive harder to get better deals," he said. "This is a time
when tenants can pull out a sledgehammer and do deals."
Because of the weak leasing market,
he said, landlords are offering longer periods of free rent
and are contributing more money to interior construction. "We
are looking at 12 to 14 months of free rent on 10-year deals
and work letters of up to $60 a square foot," he said. The uncertain
economic outlook is allowing aggressive tenants to push for
better economic terms, he added.
The very uncertainty about the economic effects of the conflict
is a drag on the industry, said John F. Powers, a vice chairman
of Insignia/ESG. "Our business is all about confidence in the
future," he said. "You need to be confident to sign a lease
for 15 years."
He said the actual outbreak of hostilities had changed little,
since the diplomatic run-up to the war had already unsettled
the office leasing market. "The last three months have been
disrupted by anxiety over the anticipation of war," he said.
He said the fact that New York is a possible target for terrorism
has combined with the nature of the current economy to slow
the pace of office leasing. "This is an environment of slow
growth and relatively high unemployment," he said. "Productivity
gains do not need office space."
The uncertainty about the economic effects of the war is also
slowing the investment sales market, as foreign investors hesitate
to make purchases until the outlook is clearer, said Bruce Mosler,
the president of United States operations for Cushman & Wakefield.
"Foreign investors have been taking a wait and see position
for some time," he said, "and they may find other areas more
attractive" if the war goes badly or there is another terror
strike.
Uncertainty aside, some investment deals are being done. James
D. Kuhn, the president of Newmark & Company Real Estate, said
the 600,000-square-foot building at 636 11th Avenue sold recently
for about $45 million. The seller was Global Crossing, an ailing
telecommunications company, and the buyer was Jacob Frydman,
a local investor.
The war appears to be aggravating a mismatch between long-term
opportunities in the office leasing market and short-term thinking
on the part of many space users, said Michael Colacino, the
president of Julien J. Studley, a tenants' broker. "There are
opportunities to grab early renewals, but most people are thinking
month-to-month, so there is very light demand," he said.
He said a lot of clients were concerned about security, and
those with three or four years left on their current leases
are not certain they want to make a commitment to stay in Manhattan.
A quick, decisive victory in battle might improve the leasing
market by giving business managers a feeling of confidence in
the future, said Peter G. Riguardi, the president of Jones
Lang LaSalle. "Real estate is a reflection of the general
business environment, which has been in limbo for months," he
said. "If the conflict were to resolve itself, that might be
the impetus for recovery."ΚΚ
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