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Spurred by Expansion of the Convention Center, A Long-expected Hotel Building Boom
 in Philadelphia Center City Is About to Begin; Tight Loan Market Must Cooperate

By Tom Belden, The Philadelphia InquirerMcClatchy-Tribune Regional News

Jan. 14, 2008 - A long-expected building boom in Center City hotels spurred by expansion of the Convention Center is about to begin.

Unless the real estate credit crunch slows it down.

Details have been revealed about four new hotels totaling 800 rooms, but developers are well along in planning construction of at least 1,500 more rooms, according to hoteliers, consultants and convention officials. The supply of rooms would grow by more than 20 percent if all the developers' plans come to fruition.

But consultants who monitor the market cautioned that developers and hotel operators are making their plans at a time when lenders have cut back sharply on commercial real estate loans.

"The big 'what if' right now is whether anything is going to get done with the current credit markets," said Warren Marr, a director in the Philadelphia office of the PricewaterhouseCoopers L.L.P. consulting firm. "There are so many creditors now that are not making loans."

The tight credit market could affect the large, costly projects that don't have financing locked up yet. But for some developers of smaller projects, financing is not expected to be a problem.

"Before the Convention Center [expansion] opens, I don't think it's prudent to do a big one," said Jay Shah, chief executive officer of Philadelphia-based Hersha Group, which is firming up plans for midsize hotels.

Several of the lodgings would be north and west of City Hall and within a few blocks of the planned Broad Street entrance of the enlarged Convention Center, which is scheduled for completion in late 2010.

"There could be 2,300 rooms entering the market around 2010," said Peter R. Tyson, vice president in PKF Consulting's Philadelphia office.

The construction is planned as existing hotels are coming off their two best years in almost a decade, with demand driving up the average rate charged to a record $169 a day in 2007, according to PKF Consulting.

Center City hotels, which have one-quarter of the region's 40,000 rooms, enjoyed an occupancy rate of more than 74 percent last year, the best performance since 1998, Tyson said.

In addition to demand from conventions and business travelers, hotels sold an estimated 100,000 room nights to visitors drawn by the King Tut exhibition at the Franklin Institute, said Bill Fitzgerald, president of the Greater Philadelphia Hotel Association. He was citing statistics kept by the Greater Philadelphia Tourism Marketing Corp.

"Getting a room in a hotel right now is tough," said Jack Ferguson, executive vice president and chief salesmen at the Philadelphia Convention and Visitors Bureau. The healthy revenue produced by high occupancy also has prompted Center City hotel owners to budget $230 million in 2007 and 2008 for renovations and improvements designed to keep them competitive when new lodgings open, Ferguson said.

The high occupancy levels are expected to take a big dip -- into the mid-60-percent range -- once 2,300 more rooms are open, the lodging consultants said. "It's been two very good years in part because there haven't been any additions to the supply" since 2001, Tyson said.

The hotel projects for which developers have publicly identified the lodging chain involved are:

  • A 202-room Le Meridien hotel in the historic former YMCA building at 1421 Arch St, scheduled to open in early 2009.
  • The Hotel Palomar, a project of Kimpton Hotel Group, with 235 rooms, in the Architects Building on the northeast corner of 17th and Sansom Streets. The boutique hotel is to be ready in fall 2009.
  • A 92-room limited-service Four Points by Sheraton hotel on the Northwest corner of 12th and Race Streets, which should open this summer.
  • A luxury W Hotel, one of the Starwood chain's brands, with 275 rooms, on the southwest corner of 12th and Arch Streets, facing the Convention Center's existing entrance.

No hotel operators or brand names have been identified yet for the largest projects on the drawing boards, 900 rooms in two properties on the southwest corner of Broad and Race Streets.

The Broad and Race location, across from the second entrance to the Convention Center once it's expanded, is now the headquarters of Parkway Corp., the city's largest parking garage operator and one of the developers of the W Hotel.

Consultants and other officials said the hotels planned at Broad and Race won't be operated by Renaissance, the Marriott division that last year was widely expected to run it.

The Vine Street hotel is to be part of condominium and retail development that will include a new Whole Foods supermarket.

Shah, whose Hersha Group includes separate hotel real estate and operating companies, is working on two hotels in Center City and two in University City. He said he wasn't ready to identify the brand names of the hotels, which all will have 200 or fewer rooms.

Shah said Hersha, which owns 75 hotels, including more than a dozen in the Philadelphia region, plans developments that will be "driven less by demand from the Convention Center but what we think are market conditions for hotels of the right size."

Because of the tight credit market, he added, "pulling off a large group-hotel project is a lot more challenging that it was just six months ago."

Kimpton, the San Francisco-based operator of 41 stylish boutique hotels, is thinking along the same lines about Center City's market prospects. Its Hotel Palomar will appeal to business travelers and well-to-do vacationers who like upscale surroundings, but it won't be heavily dependent on convention business, said Joe Long, Kimpton's executive vice president, acquisitions.

At the same time, expansion of the Convention Center "was certainly a factor in our planning," Long said. "It has a ripple effect for all the hotels. . . . The high end of the convention market will also be looking for high-end hotels."

But for another hotel operator, HEI Hotels & Resorts of Norwalk, Conn., proximity to the Convention Center was key to its decision to acquire the Le Meridien hotel once it's completed next year, said Steve Mendell, executive vice president, acquisitions and development. Le Meridien is a luxury brand of Starwood Hotels & Resorts Worldwide Inc., which also operates the Sheraton and Westin chains.

HEI already runs the Westin and Embassy Suites hotels in Center City, so "we know the market very well," Mendell said. "But neither of those is really close to the Convention Center. We thought it made sense for us to be really close by the center, and the expansion is a very important part of our strategy."

Contact staff writer Tom Belden at 215-854-2454 or tbelden@phillynews.com.

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Copyright (c) 2008, The Philadelphia Inquirer

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