Improving fundamentals in the Boston hotel market may soon have developers calling room service and ordering up a delicacy rare in Boston in recent years – new hotel construction.
Climbing room rates and a sufficient number of heads on beds over the next one or two years could conspire to bring previously permitted hotel projects iced by the recession back to the table.
Boston’s hotel sector is expected to outperform the country’s top 50 markets through 2012. Revenue per available room (RevPAR) is expected to be nearly double the rest of the country, and average daily room rates are projected to be more than $50 more than the nation’s other top hotel markets, according to hospitality industry tracker PKF Consulting.
Currently, room rates look like they could climb into the $250-per-night range at higher-end hotels in the next 24 months – as long as demand and RevPAR continue to increase, said Jim O’Connell, principal of Danvers-based hotel advisory firm O’Connell Hospitality Group. He noted the approximately 4,000 rooms permitted for construction in Boston, including two hotels Joe Fallon has planned in the Seaport, another by Madison Properties near the South Boston convention center and Stephen Karp’s permitted boutique hotel on the site of Anthony’s Pier 4.
“It won’t be long before new construction will start to take effect. There are a lot of properties on the waterfront on paper now that we might start to see,” O’Connell said. “There’s still no debt right now for new construction. But as competition increases to place debt for hotels as things improve … construction will open up.”
Hotel investors and developers are constantly looking for a foothold in Boston because the city is a top-tier hotel market. Because little new product has been built lately, the city is practically ripe for new development, said Eamon O’Marah, senior vice president with Jones Lang LaSalle’s investment development team. O’Marah, co-owner and developer of Boston’s Ames Hotel, said he is seeing stronger performance in rates and occupancy than in recent years, and that new construction of certain types of hotels in Boston could start in the next 12 to 24 months.
Sources indicated that early on, flagged, select-service hotels – think Marriotts and Hiltons – are most likely to be the most easily financed products. Full-service, luxury models are very expensive to operate, and rate and occupancy revenue can only go so far.
“I do think there is demand for more hotels. Certainly the [Boston Convention and Exhibit Center] is demanding more keys for itself,” O’Marah told Banker & Tradesman. “As the previous wave of multifamily demand evolved to the point where it’s supported development, I would predict that you are going to see the economics surrounding hotels reach a point where we will be able to underwrite some new hotel product in Boston.”
Competitive underwriting will be key to future development, O’Marah said, with those projects exhibiting the most appropriate sponsorship and boasting the soundest economics bound to attract lenders’ attention sooner or later.
The REIT Goes On
Still, O’Marah cautioned, there is still a gulf between new construction costs and investment costs for existing properties.
The W Hotel sold for about $381,000 a key, and the Radisson Hotel Boston sold for around $400,000 a key. If a developer says it can build a new downtown hotel for $500,000 per room when an investor can buy one for $400,000 a room, why would a lender consider financing new construction?
But as room rates, occupancy and other factors improve, the cost to buy is edging closer to the cost to build, experts say.
“Certainly we’ve already seen that we’ve surpassed the long-run average for occupancy and room rates for Boston in 2010, and now we’re well above the average,” said Andrea Foster, vice president for PKF Consulting.
If and when hotel construction does begin anew, what we are not likely to see in the near future are higher-end products – especially not when they cost about $600,000-per-room, or $450-per-square-foot, to build.
And they’re not only expensive to build. The prices to purchase luxury product have been driven so high by REITs with easy access to equity that in some cases the REITs themselves are the only entities able to afford the assets, said Joshua Bowman, a real estate attorney focused on the hospitality sector with Boston-based law firm Sherin and Lodgen.
“I’ve been involved in several transactions that only REITs are able to afford what they’re paying for hotels,” Bowman told Banker & Tradesman. “REITs get equity easier than ever before and can go do all-cash deals.”
In Boston, the Radisson was sold in 2010 for $143.5 million to a private equity fund, according to data obtained from The Warren Group, publisher of Banker & Tradesman. The Fairmont Copley Plaza was bought by a FelCor Lodging Trust, a REIT, in late 2010 for $98.5 million, according to reports. The Hyatt Regency sold to another REIT, Pebblebrook Hotel Trust; and REIT HEI Hotels bought a controlling portion of the Liberty Hotel in 2010, O’Connell said.
