Morristown, N.J.-based Normandy Real Estate Partners and Newton-based Blue Hawk Investments entered into a joint venture partnership to purchase and redevelop Newton’s Hotel Indigo, a 7-story, 191-room property. It’s the region’s first branded boutique hotel, designed for travelers between the ages of 25 and 44 who desire a luxury experience outside the realm of a traditional hotel.
Normandy Real Estate Partners, one of the nation’s leading private equity firms, has purchased more than $1 billion in commercial real estate in Massachusetts over the past 18 months, making the firm one of the largest such buyers in the Boston area.
In addition to its portfolio of suburban office buildings and downtown office space totaling more than 3.7 million square feet, Normandy has added two hotel properties: The former Holiday Inn in Newton, which has just been reflagged as the Hotel Indigo, and the historic Ames Building on Court Street, which is under construction as the Ames Hotel.
The reasons for the two purchases are clear. Hotels can be a defensive investment strategy, particularly over a long cycle. Additionally, the acquisitions were chosen for their ability to create value and opportunity through Normandy’s vertical integration, where the firm mobilizes its development and construction staff to renovate and reposition the property. The prime locations for these properties and the office markets they reside in made them compelling investments. Finally, independent research consistently shows that the Boston will be one of the leading investment markets for hospitality properties through 2013, if judged by occupancy rates, overall room value and average daily rates.
The area’s hospitality sector is benefiting from new bookings at the Boston Convention and Exhibition Center, generating demand for 35,000 new-room nights in 2008 alone, a trend anticipated to continue through 2011 – and there just aren’t that many new hotels to satisfy that need.
In 2007, Boston was named the top destination in the United States for international group meetings by the International Congress and Convention Association, having skyrocketed from ninth place in 2005 to first in 2006. Overall, 997,000 visitors from overseas came to Boston in 2006, an increase of 24 percent from the previous year, according to the Greater Boston Convention and Visitor Bureau. The trend is likely to continue given the weakness of the dollar, especially compared to the Canadian dollar, Britain’s pound and the euro. Nationwide, in the first three quarters of 2007, international visitation to the U.S. increased by 9.8 percent, according to the Department of Commerce.
In addition, Boston’s office market has been holding its own in the softening economy. Normandy’s portfolio signed more than 650,000 square feet of new leases in 2007. Historically, there has always been a strong correlation between office occupancy levels and hotel occupancy. Furthermore, the technology sector – a pillar of the area’s employment base – has remained strong, in large part because of the weakening dollar. The life sciences industry, which is more immune to economic cycles, is also doing well. The state of the office, life science and technology sectors bodes well for Hotel Indigo, situated along Route 128.
Normandy and Blue Hawk Investments entered into a joint venture partnership last year to purchase and redevelop the 7-story, 191-room property, which is now open and managed by Peabody Hotel Group under a license agreement with a company in the InterContinental Hotels Group. Hotel Indigo, located at the junction of Route 128 and the Massachusetts Turnpike, is the industry’s first branded boutique hotel, designed for travelers between the ages of 25 and 44 who desire the boutique experience of luxury, service and an alternative to traditional hotels without sacrificing any of the business amenities they have come to expect. Additionally, the hotel will include a modern steakhouse concept called Bokx 109, a higher level of suburban dining.
The location of the hotel, also adjacent to an MBTA Green Line trolley stop, is expected to draw business travelers during the week, as well as tourists on weekends who want easy access to downtown Boston via mass transit, when they may be visiting local colleges or attending major sporting events in the area.
Hotel Indigo is unique in that it bases its design around art, nature and math – specifically the Golden Mean, also known as the Fibonacci Sequence or Phi. (Phi and the Fibonacci Sequence describe a pattern of numbers that increase by adding the two previous numbers until it reaches the fixed value of 1.618034. For example: 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233 ad infinitum.) The use of Phi in the design of Hotel Indigo is reflected in many ways. For example, the headboards are “golden rectangles,” meaning the sides are made up of two successive Fibonacci numbers.
As a strategy, Normandy’s hotels aim to be unique, meeting the needs of travelers looking for a lifestyle experience, and/or are in prime locations. The Ames hotel, like the Indigo, meets both criteria.
The landmark Ames Building, which is being redeveloped into a 123-room luxury boutique hotel, is the second-tallest, masonry load-bearing structure in the world, built in 1889 and located in the heart of downtown Boston. It is steps from the city’s major tourist attractions, such as Faneuil Hall and the Old State House, a location ideal for those attending business in the financial district or Government Center, as well as those in Boston on leisure. Occupancy is expected to exceed market norms for hotels in the area.
Normandy purchased the Ames last year, knowing that Boston makes hotels an even better investment because the city benefits from strong weekday demand from business travelers, as well as high weekend demand from domestic and foreign travelers who want easy access to Boston’s historic sites. Boston consistently has brisk weekend bookings from tourists, many of them foreigners taking advantage of the weak dollar, the city’s relative affordability and easy airport access.
The 2007 U.S. Hotel Valuation Index by Michael J. Pajak and Sumit Kapur, both consulting and valuation analysts at HVS Hospitality Services, looked at 66 markets in the nation and found Boston to be a great place to buy, along with San Diego, Calif., Miami, San Jose, Calif., San Francisco and New Orleans. The reasons include positive trends in per-room values and low volatility. HVS, in a recent presentation to the New York University hospitality group, also placed Boston among the top 10 markets nationally for occupancy levels, average daily room rate and increase in value per key.
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Although Boston suffered a 23 percent decrease in per-room value from 2000 to 2006 due to the general economic slowdown after the Sept. 11, 2001, terrorist attacks, the market posted 17 percent growth in 2006, following an initial recovery in 2004. Between 2006 and 2008, the Boston market has been forecast to exceed the national average, with per-room growth of 25 percent, a gain of $56,000 per room through 2008, the 10th-highest per-room dollar increase.
Overall, the domestic HVI shows that hotel values increased, on average, by 22 percent across the United States in 2006, compared with gains of 26 percent in 2005 and 28 percent in 2004. There were decreases of 1 percent in 2003, 1 percent in 2002, and 24 percent in 2001, resulting from the terrorist attacks. On average, per-room values in the United States grew by about $18,000 in 2006, signaling double-digit rates across the country.
Outside of Boston, Normandy owns two other hotels: The Chelsea, on the boardwalk in Atlantic City, N.J., and the 444-room full-service Westchester Marriott in Tarrytown, N.Y. The Atlantic City project involves the total redevelopment of a Holiday Inn and a Howard Johnson Hotel into a premier boutique non-casino hotel with amenities and services typically overlooked in that market (such as three celebrity-chef restaurants and a branded New York City nightclub). The Tarrytown property offers a Morton’s steakhouse and is being upgraded to better attract group demand.
Having a particularly good location is one factor that can make hotels a good investment even in a down market. Of course, not all markets offer such great hotel investment opportunities. In 2007, 62 of the 66 markets that HVS studied had increases in value per room; four markets registered declines: Long Island, N.Y., Las Vegas, Washington, D.C., and New Orleans.
Justin Krebs is a partner at the Boston office of Normandy Real Estate Partners (www.normandyrealty.com), a Morristown, N.J.-based private equity firm.
