When it comes to Greater Boston’s hotel market, the numbers are there, but the financing is not.

Despite continued growth in occupancy levels, as well as room rates, the region’s hospitality industry is struggling to find investment capital to add needed supply, with a national distaste for such product seen as the main roadblock to securing development funds locally.

“It’s a tough climate to do a lot because of Wall Street’s thumbs-down outlook on the industry,” acknowledged Geoff Baekey, a hospitality specialist with Pricewaterhousecoopers. “It has gotten a lot more complex.”

Underscored by Starwood Hotels & Resorts’ difficulties securing financing for the hotel planned alongside the South Boston convention center, several Hub hospitality projects have found tough sledding in attempting to obtain financing. While proponents of those deals – which include 90 Tremont St., the former Boston police headquarters, and Sawyer Enterprises’ 432-room Theater District hotel – insist they will ultimately succeed, observers say the climate has changed markedly from the past few years, when hotels were among the most sought-after product by investors.

“The money is certainly not falling off trees,” acknowledged Jeff Saunders, president of the Boston-based Saunders Hotels. “It is out there, but it is harder to find and more expensive to get.”

One concern has been a glut of new supply being added, particularly in the suburbs, that is now opening or about come on line in the coming months. Along with the just-opened Tage Inn in Somerville, a Hampton Inn is underway in Revere, as is Saunders’ 208-room Comfort Inn, which will open in Revere in August. According to hotel analyst Matthew Arrants of Pinnacle Advisory Group, the full effects of those additions has yet to be felt. Indeed, even with new projects coming on line in such communities as Andover, Burlington and Marlborough, Arrants said the Bay State has outperformed expectations during the first five months of 2000.

“Overall, it looks like this will be a banner year,” Arrants said. “Things just keep chugging along.”

In the core Boston/Cambridge market, for example, occupancy is up significantly over 1999, posting a 73.2 percent rate through May versus a 67.8 percent mark last year. Sold room nights are up 10.4 percent over the same period in 1999, while average daily room rates have increased by 6.2 percent, from $174.98 last year to $185.84 at present. That is above the 5 percent Pinnacle had predicted, Arrants noted, even with the addition of the 600-room Hilton at Logan International Airport and the 362-room Wyndham Boston Hotel in the Financial District.

“The new supply is getting absorbed,” Arrants said. “Everybody is doing real well.”

‘Dark Clouds’
Given those dynamics, Arrants said he is surprised that the capital markets have not responded, attributing the situation to the national investment climate. Baekey said the depressed stock prices of real estate investment trusts and major players such as Starwood has been another factor, adding that the intricacies of doing business in Boston do not help.

“Boston is not an easy place to get things done,” he said. “The soft and hard costs – labor, the price of land and costs of materials – makes it more difficult here.”

At the same time, those barriers to entry make the Hub and Cambridge an attractive destination, said Aaron Greenman, a senior consultant with Ernst & Young’s Hospitality Services Group. “Any major hotel company that is not in Boston wants to be here,” Greenman said, listing the city as one of the top three markets in the country. Revenues per available room, or RevPar, have increased from $99 in 1994 to $141 today, Greenman said.

Greenman and others said they believe the Intercontinental Cos. will get the hotel at 90 Tremont St. underway, even with a difficult site that limits what can be placed there. Some sources said Intercontinental, whose principals did not return phone calls, is trying to sell the site to a hotel operator, for whom it would supposedly develop the project on a fee basis. Sawyer’s agreement with Loew’s Hotels is a boon for its plan, the analysts added, while the proposed Battery Wharf hotel in Boston’s North End is also seen as a fundamentally solid concept.

Still, even with the market’s continued resilience, most agree that financing will not come easily. “I don’t think the capital markets are going to change significantly in the next 12 months,” said Baekey, who attended a national hotel conference in New York City earlier this month and found a climate of uncertainty. “Very few people were willing to stick their necks out and say 2001 will be strong, flat or declining,” he said.

Saunders, meanwhile, said he believes occupancy levels have peaked in Boston, and predicted that room rates will flatten after several years of hyperactive growth. Even though Saunders predicts that the Comfort Inn in Revere will exceed his firm’s original expectations, he said that project and other infill hotels will cause difficulties for properties farther out in such communities as Danvers and Burlington.

As for the financial situation, Saunders said lenders are applying the same fiscal prudence seen in other real estate development, including office and retail space. Following the brutal crash of the late 1980’s – one that decimated the state’s hotel industry – Saunders said he believes there is still an overhang from that period.

“The dark clouds of 1989 are still hanging over us,” Saunders said.

At the same time, Saunders remains upbeat about 2000, particularly with a solid convention year that will be accentuated with the National League of Cities conference in December. That normally slow period will see about 6,000 people pour into Boston, Saunders said, helping to offset a slow convention year in 1999.

“It has been an outstanding year, and the rest of the year is looking equally strong,” Saunders said.

Suburban Projects, Money Woes Put Squeeze on Hub Hotel Starts

by Banker & Tradesman time to read: 4 min
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