Seattle area hotel developers continue with aggressive plans

By CHRISTOPHER BURDETT
The Chambers Group

If you were in the hotel business in 1997 and didn't make money, you might want to consider finding a different line of work. This seems to be the overwhelming opinion, both locally and nationally, of those in the industry.

From the front page of the Daily Journal to the cover of Newsweek, the lodging industry has been enjoying significant publicity due to the exponential increase in mergers and acquisitions, as well as the continued growth in demand, room rates and hotel values. Whether an investor, developer, or operator, 1997 will likely be remembered as a banner year.

King County has more than six full-service new hotels under construction or being planned including the new Starwood Hotel at Fourth and Seneca.

Those who have traveled to Seattle know that our local hotel market is strong. Those who were fortunate enough to find a room in the downtown area undoubtedly paid a premium for it. With market occupancy at just below 80 percent, and room rates growing well in excess of inflation, local hoteliers enjoyed another great year in 1997.

Seattle's hotel market strength seems to come from continued growth in travel and tourism, a vibrant business environment, and strong convention activity.

Even more important is the expectation that 1998 will continue this trend. Going forward, local hoteliers see continued growth in the travel and tourism sector and a strong increase in the number of conventions and convention delegates. Unlike much of the 1980s when corporate spending was down and the local economy was struggling, the expectations for continued growth in room night demand is strong.

Although nationally the trends aren't quite as positive, Seattle continues to offer much more than it has in the past. The redevelopment of the downtown core is a significant factor in driving tourism business as well as convention and corporate business. With renewed emphasis placed on the importance of a strong downtown core and continued expansion in office and retail development, high expectations appear to be well-founded.

With the overwhelming success in the lodging industry during 1997, we continue to see an aggressive approach to development, similar to 1996. Current trends seem to be shifting away from limited-service hotel development to more aggressive full-service development.

King County currently has more than a half dozen full-service hotels either under construction or in the planning process. These include the new Starwood Hotel on Fourth and Seneca in downtown Seattle, a hotel atop the expansion of the Washington State Convention & Trade Center, a full-service Marriott as part of Bellevue's Meydenbauer Center expansion, and a 500-room hotel adjacent to Bellevue Square as part of the $300 million Lincoln Square project.

Marriott is also expected to build a 300 room full-service hotel across from Bell Harbor in downtown Seattle during 1999. The movement toward full-service development mirrors what is occurring nationally in other major markets.

Although full-service development appears to be a large component of the next lodging cycle, limited-service development continues at an aggressive pace both nationally and locally. King County experienced a record number of new limited-service hotels in 1997. In Tukwila and Kent alone there are no fewer than a dozen new hotels open or under construction.

North Seattle and south Snohomish County continue to grow their room bases with the development of extended-stay and limited-service hotels such as Extended-Stay America, Homestead Village, Hampton Inn and Sierra Suites.

Both downtown Seattle and downtown Bellevue experienced an increase in the number of limited-service rooms as well. Because the Seattle retail and central business districts have a limited amount of available land for new construction, development is now occurring north of the city core.

Although there have always been hotels north of the city and around the Seattle Center, the development of new hotels in the area is somewhat recent.

The Residence Inn on Eastlake was considered a pioneering development when it was completed in 1991. Late 1996 and 1997 established a new era for hotel development north of the city. Near the Seattle Center, both a Hampton Inn and Hawthorne Suites opened with a combined 200 rooms, and a 161-room Homewood Suites on Elliott Avenue is scheduled to be completed this spring.

Most recently, Holiday Inn Express opened 195 rooms on Aurora Avenue with plans to expand in the near future. Current hotel construction includes both a Silver Cloud and Courtyard by Marriott, on the east and west sides of Lake Union, respectively. With the continued growth and expansion of local businesses around Lake Union and north of the CBD, these hotels are likely to experience similar success as those in the downtown core.

With the increase in new hotel construction, developers are beginning to speculate that the industry is heading for a fate similar to the 1980s. In the late 80s new lodging development was nearly non-existent due to less-than-favorable tax laws and unavailable financing. Today, there are enormous amounts of money, and just as many conduits for financing as ever before. The major difference today is that the vast majority of the money is coming from Wall Street.

Hotel Real Estate Investment Trusts (REITs) are the current darlings of Wall Street. REITs such as Starwood Hotels & Resorts Trust, Patriot American, Sunstone and American General Hospitality have acquired more hotels and hotel companies in the last two years, many of which are in the Seattle area.

Although REITs are extremely popular with Wall Street today, they are beginning to catch the attention of government regulators. Hotel companies like Marriott and Hilton believe that REITs, and more directly paired-share REITs, create an unfair playing field.

Because it is essential that REITs continue to grow in order to draw investors, many hotel companies are now beginning to witness a cycle of development similar to the last hotel building boom of the early 1980s.

Unchecked, REITs could force new supply to grow well beyond new demand. Locally, and nationally, the effect could be a decrease in both room rates and occupancy. Fortunately for Seattle, the area has historically lagged behind the country in development cycles, as we have yet to experience some of the dramatic growth in hotel supply as seen on the East Coast.

While over-development did occur in past, those hotel developers and operators that survived the 1980s and are around today continue to be optimistic about the near future.

Expansion north of Seattle's Central Business District, redevelopment of the downtown core, and the increase in local and international travel, has reinforced Seattle's strong hotel market and given rise to new lodging development. Expectations are that Seattle hotel operators will continue to have strong room rate growth and solid occupancy, while developers will only add new supply when and where demand is supportive.

Copyright © 1998 Seattle Daily Journal of Commerce.