Hotels are back
Higher occupancy rates and values draw investors

by Donna C. Gregory
for Virginia Business
January 2006

In a real-life game of Monopoly, investors and developers are once again rolling the dice, buying and building hotels. During the past three years, hotel occupancy and room rates have increased steadily, leading investors to take a fresh look at an industry that’s finally rebounding after 2001’s terrorist attacks.

In Virginia, the renewed interest is bringing new hotels to Virginia Beach’s oceanfront, downtown Norfolk and many suburban markets. One of the hotel industry’s largest franchise players, Choice Hotels International Inc. of Silver Spring, Md., is developing 11 properties in Williamsburg, Fredericks-burg, Norfolk, Chesapeake, Newport News, Suffolk, Dumfries, Emporia and Wytheville.

In Hampton Roads alone, at least 10 hotel projects are in the works, including a 20- to 25-story luxury project, most likely a Hilton, that will be built in Norfolk next to a new conference center. (See story on page 33).
For Choice and other developers, 2005’s solid year of business, convention and international travel was a green flag for capital investment. “If you look at the most recent Smith Travel Research data ... you’ll find that room demand is up 2.9 percent while room supply is up 0.4 percent. This is one reason you’re seeing increased interest in the hotel industry. Demand is outpacing supply,” says Ron Burgett, Choice Hotels’ vice president of franchise sales and development.

In fact, 2005 is expected to show the highest occupancy level since pre-9/11, as well as the largest average daily rate increase since the late 1990s. By early December, occupancy rates were up, industrywide, by 2.5 percent and average daily room rates by 5 percent, according to Smith

Travel Research
Meanwhile, financiers are seeing a spike in investor interest. “We’re getting substantial calls for hotel financing,” says David T. Kra, an originator and team leader with Citigroup Global Markets in New York. “In the last six months, my team has funded 15 hotels for over $100 million. These hotels have been in the Virginia/North Carolina markets.”

Deal making is also in high gear for John B. Levy, principal of John B. Levy & Co., a real estate investment-banking firm in Richmond. During October and November, the company secured financing for eight hotels, including a new $12 million venture by Tidewater Hotels & Resorts along Virginia Beach’s oceanfront.

Investors want in on deals, says Levy, because “people are traveling more and room rents are going up, so all of sudden, hotels are worth more than they were.” After 9/11, travel fell off, he notes, and people went into conference-call mode. “[People] were just scared to travel, so hotels found their occupancy went down and their rates went down, but now, confidence is up.”

New oceanfront hotel
The new SpringHill Suites by Marriott will be the fifth hotel in five years that Tidewater Hotels & Resorts has built at the Virginia Beach oceanfront. Located between Ninth and 10th streets, this all-suite hotel will include 168 rooms alongside 24 luxury oceanfront condos, with a passageway connecting the two projects. “We hope to be open in the spring of 2007,” says Tim Stiffler, president of the Virginia Beach company.

To make way for the new project, Tidewater Hotels & Resorts will demolish the aging Dunes Motor Inn. “Guests are attracted to new product, so I think there’s always going to be a fair amount of hotel development,” says Stiffler. The company also plans to own and operate two new Marriott Hotels in the Bridgeway Commerce Center in Suffolk scheduled to open in late 2006.

Although today’s flexible financing options are attractive, the real impetus behind Tidewater developing SpringHill was the availability of land – land that Stiffler says is hard to come by in today’s real estate market. “What you’re finding is competition for available land. Condo development is really driving the market right now, and that’s pushing the prices of land up considerably,” says Stiffler.

Hampton Roads a hot spot
Doug Henkel, a senior vice president and broker with CB Richard Ellis in Norfolk, shares Stiffler’s frustration. “Almost daily, I talk to someone about building a hotel somewhere,” he says. However, there’s little land available in desirable areas to show. Construction costs are also soaring, he says, but that’s not stopping developers and investors.

“The Hampton Roads area has been very strong and has maintained growth in occupancy and rate,” adds Henkel. “If you look at the occupancy rate for Norfolk and Virginia Beach, we’re currently running 72.2 percent, which is up almost a point from last year during this same time.”
Greater Richmond is another desirable market. In downtown Richmond, the former Miller & Rhoads building at Fifth and Broad streets is slated to become a 240-room Hilton Hotel. Along East Main Street between Fifth and Sixth streets, two 25-story towers are planned. The buildings, to be called Centennial Towers, would feature a boutique-style hotel combined with high-end retail, office space and condominiums.

Another fast-growing segment in the hotel industry is the extended-stay market. Choice Hotels recently entered the economy extended-stay market when it acquired 67 Suburban Extended Stay hotels, including several in Virginia. Customers include construction crews and others on temporary work assignments and people relocating because of life changes. “The economy has been very strong and the lack of supply has really created an opportunity for these types of facilities to do very well,” says Kevin Lewis, Choice Hotels’ vice president of extended-stay brands.

A long-lasting boom?
So how long will this hotel boom last? “What we’re seeing on a nationwide basis is this steady increase over 2003, 2004 and 2005, and we see that as continuing over the next year or two,” says Citigroup’s Kra. “It’s allowing new projects to go forward, and it’s allowing owners to finance with very favorable terms.”

But Levy is less optimistic. “There are some signs that the economy is softening a little bit and that would mean trouble for hotels,” he says. “I think over the next couple of months, there will probably be some other opportunities to refinance before the slowdown kicks in, but to me, this might be the last chance to do it. Hotels tend to go through cycles, and they sure went through a cycle in the post-9/11 phase. We just don’t know when the next phase will kick in.”