July 19, 2024 - In the bustling landscape of New York City (“the City”), the hospitality industry has long been a cornerstone of its strong economy. Yet, the sector faced unparalleled challenges amid the COVID-19 pandemic, with many hotels struggling to generate occupancy while staving off shutdowns and operating under the weight of growing debts.

Under the ‘right to shelter’ agreement, the City historically had a unique obligation to provide emergency housing for any individual in need. In recent times, this obligation presented a hefty challenge for the City to fulfill as its shelter system is stressed by the continuous inflow of migrants. This past March, NYC legislation was passed to limit shelter for migrants to 30 days. To procure housing, the City turned to various solutions including renting space from local hotels. According to CoStar Analytics, as of October 2023, over 140 hotels have been taken offline for the general public under various contracts to provide housing for these individuals.

Financial implications

For hotel owners, the idea of leasing their properties as migrant housing offered potential stability in uncertain times. The economic downturn brought by the pandemic left many hotels struggling to maintain operations, if not outright closing. The need for migrant housing had presented a rare opportunity for hotels to obtain steady income and higher occupancy than the prevailing market. An example of a hotel experiencing such a windfall is the Holiday Inn in the Financial District. Having fallen into bankruptcy, the hotel shortly afterwards was approached by the City to rent the entire hotel to house migrants, guaranteeing full occupancy and substantial premiums above what the hotel would be able to achieve otherwise over the course of the contract.

The agreement with this Holiday Inn location is just one of several that the city has with various hotels to provide housing for migrants. According to the asylum contract directory from the NYC Office of the Comptroller from September 2023, contracts often ran for at least a year, with contract sums varying between each hotel. Amounts often fell between a range of $150 to $200 per room, per night. The Housing Authority of NYC (HANYC) Agreement often required hotels to provide maintenance services and turn over rooms to ensure that spaces are always available. Each hotel was typically paired with a not-for-profit provider responsible for managing staff and subcontracted service providers. The City also contracted with the Hotel Association of NYC (HANYC) to act as a third-party administrator to help book and manage hotels sheltering migrants. HANYC contracted hotels on behalf of the City and coordinated payments.

However, while these leases promise short-term profitability, long-term prospects from taking in migrants are uncertain. Contracts executed with the City are effective for varying lengths, with a number due to expire in 2024. The contract that HANYC entered into with the City was extended through August 2026. Under budgetary pressure to manage costs, the City continues to pursue measures to limit the inflow of migrants, such as limiting most adult migrants to a single 30-day stay in shelters, as well as other methods of shelter. Demand for shelter may further decrease, as the flow of migrants across the Southern border appears to have decreased in recent months.

Reputational risks, rehabilitation issues, and future prospects

It is currently unknown how a hotel entering into a contract with the City to house migrants impacts its ability to continue as a hotel after the contract ends or its salability to potential buyers. A hotel that was in the process of being converted into a migrant shelter was sold in August 2023 for $35.7 million, representing a significant loss as seller bought the property for $58 million in 2019. While the actual reason for the drop in price was unclear, it is possible that the hotel’s agreed upon housing responsibilities with the City was a contributing factor.

Due to the extended period of usage of the hotel rooms, it is generally expected that hotel rooms, such as the 12,000 to 14,000 rooms currently being used for migrant housing, will require significant rehabilitation before being made available for general tourism. According to Nehmer’s 2024 Hotel Cost Estimating Guide,the cost to refurnish a room greatly varies between the class of hotel, with economy class hotels generally estimated to be approximately $16,000 per room, extended stay hotels approximately $36,000 per room, and midscale hotels approximately $30,000 per room.[8] This is in addition to any additional expenditures and fees required if the hotel is associated with any brand. Individually, these costs do not amount to much but given the contract’s general requirements to make the hotel available for housing, the cost of refurbishing the hotel to return to normal use may become unattainable. President and CEO of the HANYC, Vijay Dandapani, warns that the risk of incurring large expenses for significant repairs and anything else needed to brand standards may also make hotels appear less attractive to potential investors or hotel owners looking to acquire properties.

While those matters remain as concerns, conditions have changed to make hotels more desirable assets compared to their commercial real estate counterparts. The HANYC reports that tourism has nearly returned to pre-pandemic levels, with the City expecting to receive as much as 64.5 million tourists in 2024. The City enacted a zoning amendment in 2021 requiring special permits for hotel construction, resulting in a slowdown of construction of new hotels. Local Law 18 took effect in 2023, which removed a majority of short-term rental listings. The increased demand for tourist accommodation may not be met with sufficient supply, driving higher rates for existing hotel rooms.

Hotel rates are expected to further increase as major events like the 2026 FIFA World Cup will drive even more visitors to the city, according to the HANYC. As tourists return to the City, so have acquisitions in desirable locations. Crain's reports that three Midtown hotels were sold at the end of 2023 for a sum totaling $207 million at a gain of over $40 million. A different seller sold a Times Square hotel earlier in Fall 2023 for $165 million. As such, there is a possible boom in sales of properties.

For hotels that sustained heavy losses during the pandemic, the prospect of housing migrants presented crucial opportunities for the hotels to remain afloat during the pandemic. However, the same hotels now must navigate the challenges in bringing their properties back online to take advantage of the resurgent tourist market and opportunities to come.

How Citrin Cooperman can help

Citrin Cooperman’s Hotel and Lodging Industry Practice is skilled in helping clients assess options to drive growth and achieve their strategic goals. For more information, please contact Jen Hogencamp or info@citrincooperman.com.