FEATURE ARTICLE, AUGUST 2009

HOSPITALITY’S MIXED BAG
Many hotel properties are getting hit hard by the economy, but major projects are still happening in the West.
Amy Bigley

CALIFORNIA SEES RECORD NUMBER OF HOTEL FORECLOSURES AND DEFAULTS

With no markets immune to the current economic downturn, California’s hospitality market is experiencing a rapid increase in foreclosures as the number of hotels in default or foreclosed on has skyrocketed 125 percent in the last few months.

According to California-based Atlas Hospitality Group, the state now has 31 foreclosed hotels and 175 properties in default. Making up approximately 87 percent of the total foreclosures are non-franchised hotels with franchised hotels having 59 percent of the defaulted properties.

San Bernardino County leads the state in foreclosed hotels with 19.6 percent; Riverside County comes in second with 16.1 percent; and San Diego County has 12.6 percent. Los Angeles County takes first for hotels in default with 12 percent of the total; San Bernardino County has 9.7 percent; and San Diego County follows with 8 percent.

While the initial wave of distress was seen in mostly smaller, non-flagged hotels in secondary and tertiary markets, the market is now seeing foreclosures impact all properties ranging from St. Regis Monarch Beach Resort in Dana Point to the economical Extended Stay and Red Roof in chains, according to Atlas Hospitality Group.

During a review of the defaulted or foreclosed properties, Atlas Hospitality Group determined that more than 75 percent of the loans originated from 2005 to 2007 and during that time more than 2,500 California hotels either refinanced or obtained new purchase loan financing. Based on today’s market values, it is estimated none of the aforementioned hotels have any equity remaining. The combination of declining room revenues, down 21.5 percent year-to-date, and the jump in cap rates has resulted in a massive loss in values. Atlas estimates that values are currently 50 to 80 percent lower than at the market’s height in 2006-2007.

NEW HOTEL ON THE ARIZONA HORIZON

Tucson’s skyline will be a little brighter with the development of The Sheraton Tucson Convention Center Hotel.

Downtown Tucson, Arizona, will soon have a new hotel on its skyline as the city council unanimously voted to develop a $167 million hotel component to the city’s convention center in the Rio Nuevo district.

The city-approved plan for The Sheraton Tucson Convention Center Hotel is being developed by Dallas-based Garfield Traub Development, a national hotel and public-sector developer, to fill a void in the Tucson convention market. As an attached headquarters hotel for the convention center, the 525-key property will feature a bar and lobby lounge, a spa and fitness center, a café, an outdoor swimming pool with deck, a business center, a 1,160-space parking structure and 36,000 square feet of meeting and ballroom space.

“The thing we like about [the project] is the Tucson market; and the convention center headquarters hotel it’s right in our wheel well – it’s what we do best,” says Steve Moffett, vice president of Garfield Traub, which beat four companies to win the city’s request for proposal for the project.

“We also liked that the project has the components of expanding the convention center, building a parking garage and the headquarters hotel,” Moffett explains. In addition to the hotel, the project includes a 55,000-square-foot exhibit hall and meeting room expansion at the existing convention center.

Developing the attached hotel to the operating convention center posed unique challenges for the development team. Construction has to be planned around scheduled shows and events, such as the gem show in early 2010. Another obstacle was planning the relocation of the convention center’s main entrance, which is being moved to accommodate the hotel project. On top of the development challenges is the economic downturn, which can be felt in all stages of the project from design to development and, ultimately, hotel performance, Moffett notes.

Taking advantage of Tucson’s ideal weather, the hotel will feature a large courtyard connecting to the convention center. The hotel’s design will also highlight Tucson’s environment by utilizing natural elements, such as rock, water and light, to create an inviting atmosphere.

Currently in the design stage, the project is expected to begin construction in March/April 2010 with completion scheduled for July 2012. Project partners include DLR Group as architecture and engineering firm; design-builders Turner Construction and Sundt Construction; and Starwood Hotels & Resorts. The proposed and city-approved project includes a Sheraton brand hotel; however, official hotel brand approval from Starwood Hotels & Resorts has not been completed.

FILLING A VOID IN RIVERSIDE The 132-key Hampton Inn & Suites at Turner Riverwalk in Riverside, California. A new Hampton Inn & Suites by Hilton will bring more balance to Turner Riverwalk in Riverside, California. Riverside has seen much revitalization and redevelopment recently, and soon the city will have a new hotel to serve its under-served lodging market in the Inland Empire. Riverside Lodging Associates has tapped Indianapolis-based Sun Development & Management Corporation to develop a Hampton Inn & Suites by Hilton on 2.28 acres of company-owned land at Turner Riverwalk, Turner Development Corporation’s 1 million-square-foot master-planned business park in Riverside. Although the current market is not favorable for development, when the project was planned Sun Development was able to secure financing and approval for the 132-key hotel. The modern, upscale hotel will feature a meeting room, approximately 30 suites, a fitness center, an outdoor pool and free breakfast for guests. “The market condition was pretty good at that point and there was no hotel supply [in Riverside],” explains Bharat Patel, CEO of Sun Development & Management Corporation. “The area was going through revitalization so we thought that it was the right time to do something.” Scheduled to open in February 2010, the hotel will fill a void in the western Riverside and Corona market, which has been inundated with office, retail, restaurants, industrial and medical office developments. With a population of more than 2 million, Riverside is one of the largest cities in the Los Angeles metropolitan area and is home to University of California Riverside. Hampton Inn & Suites brings a new offering to the community, which has restaurants, offices and higher education but very few lodging options, Patel notes. As such, the city was very cooperative during the planning and approval process because it really wanted to bring the project to the city. The project dovetails with Sun Development’s main development focus of hotel management and development. Patel acknowledges the difficult economic outlook but is looking towards the future. “Our company is fighting an uphill battle and we hope by the end of 2009 things will begin to get better.

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