Developers are finding creative ways to build hotels profitably in high-cost Boston, such as the 93,000-square-foot, 326-room Yotel under construction on Seaport Boulevard.
Greater Boston’s hotel market is on an extended streak of rising occupancy and room rates during a strong development cycle that’s adding thousands of rooms to travelers’ choices as they click through Kayak and Expedia.
More than 1,600 hotel rooms are under construction at seven properties in the city of Boston, with another dozen projects ready to break ground and at least eight more in the permitting pipeline. It adds up to nearly 5,500 new rooms of supply in the city alone.
The heady hospitality climate has benefited developers building a wide variety of formats, from ultra-luxury towers, like the $700 million Four Seasons Hotel & Private Residences in Back Bay, to the boutique Godfrey Hotel in Downtown Crossing and the Marriott’s Millennial-focused Envoy brand in the Seaport. A block away, London-based Yotel will test the appetite for micro-hotels with 176-square-foot guest rooms. One developer, JW Capital Partners, even is braving intense neighborhood opposition and seeking permits for a 277-room luxury hotel on pilings over Boston Harbor.
Investment Sales Market May Have Crested
The increased demand has translated into record-setting prices paid by investors for some of the city’s iconic hotel properties.
Mandarin Oriental Hotel Group of Hong Kong in January agreed to pay $140 million, or nearly $946,000 per room, to acquire the Mandarin Oriental Hotel on Boylston Street. Hamburg, Germany-based Union Investment Real Estate paid $173.9 million in December for the Godfrey Hotel, a new property that opened last year, or $718,000 per room.
“With the record-setting deal at the Mandarin, a lot of owners are saying, `When is the right time to sell? Where are we in the cycle?’” said Denny Meikleham, a managing director at HFF.
At current pricing, sellers see little upside if they hang onto properties much longer, said Rachel Roginsky, owner and founder of Boston-based hospitality consultants Pinnacle Advisory Group.
“We’re in the seventh year of the up cycle,” Roginsky said. “Many people bought hotels in 2008 and 2009 when they couldn’t give them away. They held them, the market’s improved and they’re trying to sell them at the peak.”
The next test could be the upcoming sale of the Residence Inn in the Seaport District, a historic building converted by Norwich Partners Management in a 120-room extended stay hotel.
“The Envoy Hotel has been received well and that bodes well for the Seaport,” said Mark VanStekelenburg, Northeast practice leader for CBRE Hotels. “For existing supply transactions, Boston always has high barriers to entry for development, with the possible exception of the Seaport right now. It makes it an attractive market.”
A handful of remaining vacant parcels in the Seaport District offer potential for more hotel room inventory in coming years. Massport is reviewing hotel proposals at its D-2 parcel mixed-use development across from the Boston Exhibition & Convention Center. And a 12-acre portion of the Seaport Square development acquired last fall by Newton-based WS Development is preapproved for up to 2.8 million square feet of development, including three hotels.
At the same time, a few cracks are starting to show in market demand.
Occupancy rates in Greater Boston declined 4.4 percent in the first quarter, according to CBRE Hotels research, while revenues per available room (RevPAR) dropped 3.5 percent. It’s too soon to say whether the downturn is a seasonal blip or part of a larger trend. Occupancy rates rebounded in April, according to Jenna Finkelstein, a senior consultant for CBRE Hotels.
Big Brands No Longer Mandatory
Smaller independent boutique hotels are gaining popularity as a development option in Boston. Developers no longer need to partner with a name-brand operator to carve out credibility with the traveling public.
The success of the Verb Hotel in the Fenway hasn’t been lost on developers looking to the next generation of projects. The former Howard Johnson was renovated in 2014 into a retro-themed tribute to the once-thriving live music scene of the neighborhood, with art and memorabilia from since-departed Kenmore Square rock clubs.
Eamon O’Marah, managing partner of Wellesley-based Harbinger Development, said the decision whether to ally with a large hotel operator hinges on the specific site. He hasn’t decided whether to go with a brand for the 225-room Haymarket Hotel, which Harbinger is developing in partnership with Normandy Real Estate Partners. The hotel on a vacant 1.2-acre parcel owned by the Massachusetts Department of Transportation received final Boston Redevelopment Authority approval Thursday.
A 285,000-square-foot hotel proposed by Harbinger Development for parcel A in the Raymond L. Flynn Marine Park in South Boston will be a dual-branded Hampton Inn and Homesuite Suites Extended-Stay Hotel, reflecting the business traveler-driven market in the Seaport driven by the proximity of the Boston Convention & Exhibition Center.
“In that location I definitely want to have a flag. It’s a 420-room hotel and to be able to have the two top Hilton brands for those segments exclusively in the Seaport is a remarkable opportunity,” he said.
Developer Thomas O’Brien is leaning toward an independent 196-room hotel as part of One Congress, HYM Investment Group’s redevelopment of the Government Center garage property.
“People want to have a genuine experience when they come to a city like Boston,” O’Brien said. “Creating a hotel that is simply a name brand that could be found anywhere is not the way to go.”
Global hotel corporations such as Marriott have acknowledged chain fatigue, adding dozens of “brands within brands” to focus on specific niches within the hospitality market. In the Seaport, the Envoy hotel is part of Marriott’s 100-unit Autograph Collection brand, which spotlights art and technology to appeal to sophisticated urban travelers. In November, the 115-room Ames Hotel in Boston will become part of Hilton’s Curio Collection, a group of 25 hotels that Hilton bills as unique properties reflecting the personalities of their cities.
“You can have something that acts like and feels like an independent but has the benefit of the larger affiliation with loyalty programs and reservation platforms,” O’Marah said.
Limited-service hotels are an increasingly popular option in Boston, with its high land costs and scarcity of buildable parcels. In Chinatown, Westbrook Partners has proposed a 17-story, 225-room hotel to replace an 8-story office and warehouse building at 73 Essex St.
On the outskirts of the North End, a Wilmington developer has proposed a 15,-story, 75-room limited-service hotel on a small parking lot at the corner of Valenti Way and North Washington Street.
Microhotels, like the Yotel project on Seaport Boulevard, offer significant savings in development costs, with requirements for approximately 300 square feet of space per guest room, compared to 500 square feet in a traditional select-service hotel.
Costs Of Financing Starting To Rise
Financing for new hotel development remains strong, but increasing volatility in capital markets and new regulatory requirements could choke the supply, according to industry experts.
That’s worth watching because hotels are considered one of the riskiest commercial real estate categories, since they feel the impact of economic downturns almost immediately.
While liquidity remains solid, average CMBS hospitality loan pricing has risen by approximately 0.5 percent since the beginning of the year, according to a March report by JLL’s Hotel Investment Banking team.
The floating-rate CMBS market – the primary source of capital for hotel loans above $25 million – has been affected the most, and is now effectively closed with the exception of single-borrower loans above $300 million. Debt funds have moved into the market and partially filled the gap, but have increased pricing by up to .75 percent since the start of the year, according to the report.
“(Construction financing) requires a borrower or developer who has a good relationship with a bank, and it’s going to require quite a bit of personal guarantee to get a loan,” HFF’s Meikleham said. “That’s going to be a little bit of a governor on new development.”
New risk regulations under the Dodd-Frank Act that went into effect in December are starting to push CMBS higher, with lenders required to retain 5 percent of loans they originate for five years.
“The challenge is what’s happening with the debt markets. That’s what will establish what a new buyer can pay, and there was a lack of CMBS as a channel in the first quarter,” CBRE’s VanStekelenburg said. “It’s starting to loosen up, but it’s nowhere near past amounts.”
But new debt funds formed in 2015 backed by institutional equity are showing willingness to lend for hotel debt, and banks continue to be a reliable source of non-recourse hotel loans, according to the JLL report. And construction financing in global Gateway Cities remains active, with large brands providing debt capital to launch their newer flags.
