A tight financing market for hotels derailed the planned successor to the Sir John Motel on Route 1 in Danvers shortly after the foundation was poured in 1999.

When it comes to hotels, the financing climate for such developments has been decidedly inhospitable, but it appears the chill cast upon the industry is beginning to wane. After being stalled for nearly two years, several proposed inns in Greater Boston are about to finally get under way, including some projects that were literally stopped in their tracks.

One visible victim of the capital markets crunch has been the planned $2 million structure slated to replace the Sir John Motel on Route 1 in Danvers. Developer Louis Karamas had gotten as far as laying the foundation of the new facility when the fiscal freeze hit, with the site remaining only partly completed since late 1999.

“We’re just getting ready to restart the building from where we left off,” said Karamas, adding that, “As of right now, it looks good.”

Developer David Leatherwood expressed similar optimism regarding a 164-unit motel his Vermont-based company is planning to construct just up the street from the Sir John site. The property was originally slated to open this year, but the delays in construction will push that back into 2002. Leatherwood predicted that the project will break ground later this month.

Both undertakings were swept up in a wave of negative news that enveloped the hotel industry in 1998 and 1999. After being one of the darlings of Wall Street for much of the mid-1990s, with that interest fueling a wave of new construction nationally, the added supply became a sudden cause for concern among investors. Suburban markets had been the most active in adding new stock, especially limited-service facilities, making it harder to move ahead with similar ventures once the slowdown took effect.

Largely due to strong market fundamentals, some developers have been able to push their projects along in Greater Boston. In Revere, for example, Saunders Hotel Group recently completed a 208-room Comfort Inn, while a Hampton Inn is being built along Route 1A on the Revere/East Boston line, a few miles from Logan International Airport. Both of those hotels, and another that opened recently in Chelsea, are expected to perform well due to the airport/business traveler.

Aiding the local rebound in hotel activity has been the strong fundamentals that the sector has enjoyed for several years. The metropolitan Boston area has been among the country’s leading hotel markets since the early 1990s, and the interlude during which construction waned has only served to strengthen those numbers. According to the Landauer Realty Group in its 2001 national market forecast, the Hub has a solid 76 percent occupancy rate, while its average daily rate is at $140, a 6.5 percent increase over last year. With a projected demand growth rate of 1.8 percent annually, Landauer estimates that Boston will need some 2,700 rooms added through 2005 in order to satisfy demand.

Landauer stressed that lenders are still taking a cautious approach toward financing hotels, noting that loan-to-value ratios remain in the 60 percent to 65 percent range for such projects. That is about 10 percent lower than the underwriting standards for other commercial real estate such as office or even industrial buildings. Although hotel default rates have dropped below 2 percent, Landauer maintains that the memories of the brutal recession of the early 1990s remains fresh on the minds of many lenders.

Rating the Competition
Despite that, many of the country’s leading hotel chains are gearing up for further expansion. Hilton is seeking to grow its hotel room portfolio by between 8 percent and 10 percent through 2004, while 80 percent of the 70,000 rooms in Marriott’s pipeline are in the United States. Landauer anticipates a 2.8 percent increase in the hotel room inventory this year alone.

The addition of new rooms closer to Boston could potentially affect the demand for operations farther out along Route 1, such as the Sir John or Leatherwood initiatives, but both Karamas and Leatherwood have pushed forth with the belief that their hotels will be aided by price-conscious consumers. Karamas has said he expects to market his units in the $60 range, while two existing hotels operated by Leatherwood have been offering rooms at between $95 and $125 per night. That compares favorably to Boston and Cambridge, where a harsh lack of supply often has rooms fetching above $300 per night during the busiest periods of the year.

In Boston, meanwhile, there also appears to be progress in getting several stalled hotels into the pipeline. As a new Ritz Carlton nears completion near Downtown Crossing, the Intercontinental Cos. is already under way with its hotel at 90 Tremont St. The Brighton company is also planning to convert a nearby office building into a hotel, while Sawyer Enterprises remains optimistic that it will begin work later this year on its Lowe’s Hotel in the Theater District.

In addition to those ventures, Saunders is aggressively pursuing its plans to convert the former Boston Police Headquarters in the Back Bay into a first-class hotel. Company principal Jeffrey Saunders said he, too, believes a 2001 groundbreaking is achievable for that project.

Thaw in the Financing Climate Heating Up Area’s Hotel Plans

by Banker & Tradesman time to read: 3 min