Intercontinental Real Estate Corp. has retained Suffolk Construction Co. as general contractor for a stalled hotel to be built at the historic Ames Building at One Court St. in Boston, located on the fringe of the Financial District and Government Center.
The 90-degree temperatures briefly engulfing Massachusetts last week offered hope that summer’s warmth is not far behind, but there are few indications that the long-frigid climate for hotel financing is also headed for a welcomed thaw.
“Things haven’t changed much,” Sawyer Enterprises principal John Connolly said last week of his company’s efforts to secure fiscal backing for a 390-room Loews hotel in Boston’s Theatre District. “There still doesn’t seem to be any financing out there.”
Boston has enjoyed some successes, as witnessed by Friday’s opening of a 33-room boutique hotel in Copley Square, while officials for Intercontinental Real Estate Corp. confirmed last week that they have retained Suffolk Construction Co. as general contractor for a stalled hotel to be built at the historic Ames Building, located on the fringe of the Financial District and Government Center. And earlier this month, Banker & Tradesman reported that Vermont hotelier David Leatherwood is also close to breaking ground on a 112-room hotel in the Hub’s North Station District, having hired T.R. White Co. as contractor for that assignment.
Still, although industry observers agree that the Hub continues to be undersupplied in hotel rooms, many projects have been unable to proceed, with the economic slump being exacerbated by the terrorist attacks of Sept. 11. A 185-room Regents International to be constructed on Battery Wharf in the city’s North End has seen repeated delays due to financing hurdles, while on a larger scale, there has been little visible progress in launching a critical hotel slated to be built alongside the $700 million convention center under construction in South Boston. Starwood Hotels has been stymied for nearly two years in moving that 1,200-room facility along.
“Money is tight, that’s for sure,” concurred David McElroy, managing director at Insignia/Hotel Partners in Boston. “The lenders are being very conservative.”
If anything, it seems that financing is becoming harder to secure for hospitality-related development. According to Connolly, experts at a recent industry trade show he attended in California predicted that equity requirements for hotels could actually stiffen to as much as 50 percent of a project’s cost, whereas that level had previously been in the 40 percent range.
“I do think financing will come back, but whether that will get many hotels built is another question,” said Connolly. In Starwood’s convention-center deal, for example, such a change in equity minimums could require the hotel chain to infuse another $26 million into the $265 million project in order to proceed. That extra risk could prove too much for some developers, said Connolly.
National Slowdown
The slowdown in construction is certainly not limited to Massachusetts. Nationally, hotel development has fallen sharply, with PricewaterhouseCoopers estimating there will be just 39,300 room starts in 2002, well off the 95,600 starts in 2001 and the 120,800 starts seen in 2000. Starwood is said to be looking overseas for the bulk of its expansion efforts, while other major players postponing U.S. development activity include Wyndham and Hyatt Hotels Corp. Locally, Sonesta Hotels is rumored to have put on hold an ambitious renovation of its Royal Sonesta in Cambridge.
Intercontinental Chief Executive Officer Peter Palandjian declined to provide a timetable for getting the Ames project under way. The company has already proven its ability to produce under tricky fiscal conditions, as exemplified by its 190-room Nine Zero hotel nearing completion at 90 Tremont St. in Boston. Not only was Intercontinental one of the last developers to secure hotel financing as the deep capital freeze enveloped that sector, it did so on a site where several previous attempts by national players had failed.
Some sources said the Brighton-based firm had been trying to sell the Ames Building, located at One Court St., but Palandjian said such talk was fomented by suitors who had inquired of its availability. He pledged that the hotel concept will revitalize the currently empty structure, adding that Suffolk’s addition to the design team offers additional confidence. “We are delighted to work on another hotel with Suffolk, especially given their vast experience in the hospitality category,” said Palandjian, whose firm retained the Boston-based construction outfit for the Nine Zero project as well. “We feel they have given us an all-star team to build our second hotel in Boston.”
Elsewhere, the bulk of planned hotels locally remains in limbo, with nearly all suburban activity placed on the back burner. Although Connolly noted that the plunge in operating performance began in early 2001, he said the timing of the terrorist attacks has cemented that downturn in New England. Boston was among several full-service hotel markets – those drawing from both business and leisure travelers – to see post-Sept. 11 decreases of 20 to 30 percent in the industry benchmark known as revenue per available room, or RevPar. The national average for RevPar decline in the third and fourth quarters was 15.3 percent, the greatest decrease seen in the country since 1987, according to Torto Wheaton Research.
Since the tragedy, the hotel market has stabilized better than expected, but Connolly noted that Boston received a double blow because that recovery period occurred at the outset of 2002, a time when Boston’s hotel market is traditionally softest. “We still don’t have the positive numbers to tell our story,” said Connolly, estimating it will take until later this summer for the region to rebound enough to attract capital for new projects.
Even with the lingering difficulties, Connolly said Sawyer remains committed to getting the 25-story hotel under way, even though a launch will not occur until late in 2002 or early 2003, at least one year beyond the company’s original goal. Sawyer is busy completing the permitting process, something Connolly said should be finished in time to meet the hoped-for groundbreaking. “We are continuing to work on this every day so we will be ready when the conditions [allow] us to go ahead,” he said, adding, “We believe in the location and we believe the Boston market over the long term will recover and will do very well.”
McElroy agreed that Boston possesses solid hotel fundamentals, with the lack of construction only expected to aid the market as demand improves in the coming months. Insignia/Hotel Partners also has seen investment interest in existing assets, although McElroy said many buyers have heretofore been seeking deep discounts when negotiating deals. But unlike the recession of the early 1990s, one that forced many operators to sell out at below-market rates, McElroy said vulture funds are finding the pickings decidedly slim
“People have finally gotten the message that there are no distressed transactions, at least not in New England,” he said. “There are no bargains out there.”
