The development pipeline for new hotels in greater Boston is hitting levels not seen in almost a decade as investors seek to cash in on steadily rising demand in the nation’s fifth-priciest metro area to book a room.
With occupancy rates and room fees continuing a steady upsurge, close to 2,400 new rooms will hit the market in 2015 and 2016, according to market projections by PKF Consulting USA.With occupancy rates and room fees continuing a steady upsurge, close to 2,400 new rooms will hit the market in 2015 and 2016, according to market projections by PKF Consulting USA.
“In this point in the lodging cycle, this is when developers come in and want to get into the game,” said Andrea Foster, vice president at PKF.
The building boom comprises a variety of development strategies, from the conversion of aging office buildings downtown to redevelopment of commercial properties in the suburbs.
Greater Boston hotels rebounded quickly from the recession, reflecting the region’s ability to attract a mix of business travelers, tourists and convention business. By 2010, occupancy rates had already exceeded the long-term average of 67.6 percent, according to PFK research.
The Boston Convention and Exhibition Center projects that its facility which opened in 2004 will generate demand for an all-time high of 434,000 hotel room nights in 2017, up from 336,000 this year. The Massachusetts Convention Center Authority is a partner in two of next year’s biggest hotel projects – the 180-room Element and 330-room Aloft – which break ground this spring on land leased from the authority in the Seaport District. The hotels will be operated by Starwood Hotels and Resorts Worldwide. The authority also is seeking proposals for a 1,200-room hotel tied to a proposed $1-billion, 600,000-square-foot expansion of the convention center.
Friendlier Financing
Financing terms for suburban hotel development continues to improve, industry sources say. Banks are requiring less equity and non-recourse debt is available, and the market for commercial-backed mortgage securities has rebounded in the last two years.
In early 2012, there was a shift away from value-add hotel acquisitions to interest in new development projects, said Denny Meikleham, managing director for HFF Inc. in Boston, which brokers commercial real estate capital deals. Hotels for sale were scarce, while construction financing became easier to obtain.
“The availability of debt – both construction and permanent – has been improving, and the terms under which banks are lending continue to get better and better,” Meikleham said.
Local banks have edged back into the hotel market, and insurance companies are showing a willingness to invest in high-end, full-service properties, said Keith Wentzel, a managing partner for Fantini & Gorga in Boston. An improving market for commercial mortgage-backed securities has provided another source of financing, particularly for suburban properties, Wentzel said.
“As the market has continued to improve, we’re seeing new development starting to push out into the suburbs,” he said.
In recent months developers have filed proposals for hotels in Marlborough, Revere and Watertown.
Boylston Properties acquired the former Charles River Saab property near the Arsenal Mall in Watertown, and is seeking a zone change to build a hotel, according to Watertown Planning Director Steven Magoon. CSM Corp. of Minneapolis is proposing a 153-room Hilton Garden Inn in Marlborough, and a 130-room hotel on Route 1 is on the drawing board in Saugus.
Improving financing terms are jumpstarting expansion projects as well.
Park Lodge Hotel Group is adding 51 rooms to its Marriott Courtyard overlooking Route 128 in Waltham. It obtained $8 million for the addition and $24 million to refinance existing debt at the property and its 108-room Holiday Inn Express property in Waltham, Wentzel said.
Still, as commercial properties that collect rent by the day rather than the year, hotels are some of the riskiest commercial real estate bets. They’re among the first to lose money when the economy turns sour, and last to rebound when it improves. And development costs in the city of Boston are particularly high.
“The Boston lodging market is one of the strongest in the country, but remains undersupplied, particularly with select-service hotels,” HFF’s Meikleham said. “The barriers to entry in Boston make it very difficult to develop a hotel here. Available sites are scarce and expensive, the permit process is lengthy and the cost to build is very high.”
Top-Five Hotel Market
In 2013, Boston ranked fifth out of the 50 largest U.S. hotel markets in revenues per available room (RevPAR), a key industry metric which reflects average room fees multiplied by occupancy rates. Average RevPAR rose 5.2 percent to $145.66 in 2013, according to a PKF survey of 96 hotel operators in greater Boston. Since 2009, average RevPAR has risen 45 percent.
Boston’s average daily rates of $191.33 also ranked fifth nationwide in 2013, increasing 3 percent in 2013. Occupancy rates rose 2.1 percent to 76.1 percent in the past year.
The report also indicates there’s room for growth in the luxury hotel niche, as hotels in the over-$200 average daily rate category had the biggest occupancy gain of 5.9 percent in 2013.
“As long as the demand is there, you’re going to see a lot of future hotel development,” Wentzel said. “You’re still seeing development in the Seaport and in-fill locations in the Back Bay. There’s demand for those properties as long as occupancy and (annual daily rates) stay high.”
Email: sadams@thewarrengroup.com
