Despite recession, some hotel operators are moving forward with new properties
- January 1, 2009
by Elizabeth Cooper
The timing may seem odd or maybe just oddly optimistic. In less than a year, Richmond-based Shamin Hotels will open its largest and most expensive property. Well under construction, the $55 million, 255-room Hilton Conference Center and Spa plans to welcome guests by December 2009. They will have plenty of room to relax in the property’s contemporary rooms, spa and what will be the Richmond area’s second largest ballroom.
Designed as Shamin’s flagship property, the eight-story Hilton epitomizes an aggressive growth plan seemingly unfazed by the nation’s recession. In fact, Shamin says it’s opening five more hotels geared toward business clients in Virginia this year — along with a new project in Maryland — the same number of Virginia properties the company opened in 2008.
Three more hotels are on tap for 2010 as the 30-year-old company refuses to sit idle during the uncertain economy. “The market has definitely softened,” acknowledges Lori Darling, vice president of sales and marketing for Shamin. “A lot of companies have cut back and limited business travel to essential travel, but a lot of people still travel.”
And when they do, Darling says many still prefer high-end properties where they can be pampered after a long business day. Shamin’s latest hotel is going up in Short Pump in western Henrico County, not far from the upscale Short Pump Town Center, a large, outdoor regional shopping center. “Short Pump is a growing area,” notes Darling. “We specifically built that property for the demographics of the new homes being built there and the businesses going in there.” The median family income in the area is more than $75,000.
As for financing, Darling says lenders actually have approached the company, seeking to build a relationship based on its financial history. “We never have gone into great debt and have always built slowly,” notes Darling. “Because we have never taken on a lot of debt, lenders are willing to give us credit.”
Got financing before the crunch
Other hotel investment companies also are developing properties throughout Virginia. Most secured financing before the credit crisis, with parent companies opting to ride out the economic meltdown in anticipation of better days. Seventy-three hotel projects, from Hampton Roads to Blacksburg, were under construction in Virginia as of mid-November, according to Smith Travel Research, a hotel research firm based in Hendersonville, Tenn. Most are targeted for completion between 2009 and 2011, including a new Hilton for downtown Richmond. The city’s iconic Miller & Rhoads department store will reopen in February as a 250-room hotel with 133 condominiums.
Across the nation, hotel construction has reached record levels. Yet it’s starting to slow as nervous lenders force projects to stall. According to a report by hotel real estate research firm Lodging Econometrics, the total U.S. hotel construction pipeline included 5,883 projects at the end of the second quarter of 2008, up from 5,438 projects at the end of 2007. However, construction starts decreased during the second quarter of 2008, with 327 projects officially canceled. That’s the highest number of cancellations since the quarter after the terrorist attacks on Sept. 11, 2001.
In Virginia, questions have been raised about financing for Charlottesville’s Landmark Hotel. Last month, owner Halsey Minor fired the developer of the nine-story, 100-room luxury property after a public flap regarding the project’s financing. Minor told a local newspaper that he expected a halt in construction due to the inability of Silverton Bank of Georgia to deliver on a $24 million loan commitment. The bank, though, said it planned to meet its obligations on the $30 million project.
With the economy in recession, cutbacks are expected in both corporate and recreational travel. Factor in a rising unemployment rate, and the outlook for filling new rooms is anything but rosy. While hotel operators realize that new properties may not be profitable at first, many expect no-vacancy signs to become the norm within a year or two once the economy starts to recover.
“We’re long-term investors,” says Malay Thakkar, managing partner of Chesapeake-based LTD Management Co. “We believe in the area and in the long-term viability of Virginia.” LTD plans to open five hotels in Virginia in the next two years. Most of the properties already had navigated the design and construction phases before creditors started getting anxious, but the company has faith things will turn around in the next few years.
No additional projects planned
Beyond the five already in the pipeline, however, LTD has no new projects. “The financial markets are incredibly tight, and we want to make sure the markets weather the storm in the correct way,” says Thakkar. He expects it will be a year to 18 months before the market begins to return to its previous vigor.
One of LTD’s new openings in 2009 will be a second Aloft Hotel, a new brand in Virginia. Developed by Starwood Hotels & Resorts Worldwide Inc., the hotel features loft-style rooms in a contemporary design.
LTD operates under the Marriott, Hilton, Starwood and Hyatt brands and believes those industry leaders will continue to draw business and leisure
travelers. “Anytime there’s a dip in the economy, those are the brands that bounce back first,” says Neel Desai, a managing partner with LTD.
The firm has stayed close to its Chesapeake roots but plans to expand its base. It has opened properties in Maryland and is developing a hotel in Illinois. Next up is a foray into the nation’s capital. “The natural progression is to go up north to the D.C. area,” says Desai. The company’s first project in Northern Virginia, a Sheraton, is slated to open this summer near Washington Dulles International Airport.
So far, LTD executives say they have had no difficulty obtaining financing. The company deals with national and commercial banks, typically spending approximately $18 million to $25 million to develop and build a hotel. However, LTD has yet to pursue financing for one of its largest initiatives: the Westin Hotel and Conference Center planned for downtown Norfolk.
The project, notes Thakkar, is still in the design phase. Financing is anticipated by the spring, and completion is targeted for spring 2011. The 23-story hotel plans 301 guest rooms and a 50,000-square-foot conference center, as well as private residential condominiums on the top six floors.
Blacksburg hotel moving forward
Crestline Hotels and Resorts of McLean also is developing several projects throughout Virginia. Edward T. Hoganson, senior vice president for finance and business, acknowledges that the current credit crunch presents major challenges. “Historically, it was much easier to get construction financing,” he says. “I don’t want to say it’s impossible, but it’s much more problematic. Developers have to put in more equity and get more creative on the finance side. It becomes a necessity rather than a preference because loans are not available.”
One of the country’s largest independent hotel operators, Crestline manages 70 hotels throughout the U.S. under brand names such as Westin, Hilton, Marriott and Residence Inn. It owns about 30 percent of the year-old, 38-story Westin at Virginia Beach Town Center and recently opened a Westin in Reston and a Marriott in Chesapeake.
Despite empty rooms at its current properties, Crestline is moving forward with a 137-room Hilton Garden Inn near Virginia Tech in Blacksburg. Costing $125,000 to $175,000 per room to build, the hotel is a collaboration of Alliance Hospitality — a private-equity, joint-venture real estate fund formed by Crestline’s parent company — and Armada Hoffler, a commercial real estate and construction company in Virginia Beach. “We’re trying to be careful about the markets we develop in,” says Hoganson. “The Virginia Tech market continues to perform well because of stable generators like the university.”
Crestline’s projects have been in the pipeline for at least 18 months, with funding secured before markets tightened. Before committing to a hotel project, companies do their homework. They typically look at supply and demand in a proposed market, evaluate occupancy rates, operating projections and determine whether their finances are strong enough to carry a major endeavor.
“We look at costs and returns,” explains Hoganson. “Nine times out of 10, it’s not viable.” However, he expects the gloomy economic forecast to brighten over the next year or two. “Hotel performance has been flat to down a little bit, but it hasn’t dropped off a cliff. We are cautiously optimistic that by 2010, the hospitality market will begin to recover, and by 2011 when our new hotels are fully open, they will perform in a market that’s fully strong again.”
1,900 rooms in Richmond
Operating more than 1,900 rooms in the Richmond area alone, Shamin appears to have cornered the market on the capital city’s hospitality industry. Its founder, P.C. Amin, bought plots of land in strategic places around the Richmond and Washington areas years ago. He believed that locales such as Short Pump, Glen Allen and Chester would flourish as industry and commercial activities took root.
A former Virginia Department of Transportation employee, Amin was familiar with Richmond’s infrastructure and knew where freeways and intersections would be constructed, leading to growth and demand for hotel rooms. These days Shamin officials analyze traffic flow and evaluate businesses within a five-mile area radius of a proposed hotel to determine whether businesses are growing and whether new ones are opening.
Environmental issues also factor into some companies’ decision to pursue construction in lean economic times. The JBG Cos. recently broke ground on the Renaissance Crystal City Potomac Yards and the Residence Inn Crystal City Potomac Yards, in what will be the first certified green hotels in Arlington County. Featuring an energy-saving green roof with plants and trees, the property is one of the largest building projects in the Washington area. Anticipated to open in the winter of 2010, the 13-story Renaissance will feature 300 guest rooms, 10,000 square feet of meeting space and a 10,000-square-foot grand ballroom. The Residence Inn will have 325 guest rooms and a business center.
“We have a green team that focuses on incorporating environmental initiatives into all our projects,” says Kenneth F. Finkelstein, senior managing director and chief development officer for JBG. Wells Fargo, along with three other financial institutions, approved $128.7 million in construction financing for the hotels. Finkelstein says the lenders concur with JBG about the long-term prospects for Crystal City and have confidence in the company’s track record. “We’re perceived as being a strong sponsor and having a successful brand. Those are the things that it takes these days to get any kind of financing. You need to not just check all the boxes, but you have to get an A+ in all the boxes.”