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Condo Conversions Help Philadelphia Hotels Run 74% Occupancy for
 First 9 months of 2005; Hotel Room Count Down 10% since 2002
By Tom Belden, The Philadelphia Inquirer
Knight Ridder/Tribune Business News

Oct. 26, 2005 - Center City's hot condominium market is taking a toll on another segment of urban life: There are fewer hotel rooms -- and they cost more.

The hotel room count is down 10 percent since 2002, and it could be years before it grows much again, even though the planned doubling of the size of the Convention Center could boost demand for hotel rooms by 25 percent.

Right now, however, some real estate developers who own hotels have converted them into condos, or plan to, taking advantage of the strongest market for Center City real estate in years.

The conversions have helped increase hotel occupancy and rates, so consumers are paying more for rooms.

Through the first nine months of this year, Center City hotels filled 74 percent of their rooms, at an average daily rate of $139; both figures are increases from a year earlier, according to the Smith Travel Research consulting firm.

Across the metropolitan area, the occupancy rate was 71 percent, and the average daily rate was $102, figures that also are higher than in 2004, the firm said. The region's numbers fall near the middle of the pack for other big U.S. cities.

The Center City hotel supply peaked in mid-2002 at 11,499 rooms after a surge of construction from 1998 through 2001 that was spurred in part by property-tax breaks and other public assistance given to some developers, according to data collected by Smith Travel Research and Peter R. Tyson, vice president of PKF Consulting in Philadelphia.

By this summer, the room count had dropped to 10,364 after four hotels closed to overnight guests and were converted into condominiums.

Business for those hotels was depressed for two main reasons, hotel consultants and industry officials say.

The economy was sluggish before the Sept. 11, 2001, terrorist attacks, and it got weaker in the year after, depressing business travel. At the same time, the hotel owners knew that fewer large conventions were going to use the Convention Center from 2005 through 2009 because of the reputation it developed in the 1990s for high labor costs and an unfriendly labor force.

In September, one of the largest hotels, the Radisson Warwick, announced plans to turn eight of its 21 floors into condos, which will reduce its guest-room count from 545 to 290, further shrinking the Center City room supply.

Both the industry consultants and Brian Conyers, the Radisson's general manager, said the hotel was having trouble filling its guest rooms, primarily because it did not have enough meeting and banquet space to attract the kind of mid-size and larger groups that occupy hundreds of rooms at one time.

Hotel managers and consultants said they did not expect developers to show interest in building more rooms in Center City until construction starts on the Convention Center addition, which will extend the building to Broad Street between Arch and Race Streets.

"I don't think there's going to be any development, nor does the market warrant it, until there's a shovel in the ground," said John Kroll, president of the Greater Philadelphia Hotel Association and general manager of the Hyatt Hotel at Penn's Landing.

Consultant Patrick Ford, president of Lodging Econometrics in Portsmouth, N.H., which tracks hotel development nationwide, agreed that central Philadelphia would not see any new hotels while the Convention Center expansion was still in the planning stage.

What's more, Ford said, building hotels follows economic cycles, and most new construction in the central business districts of U.S. cities came late in the last period of strong growth, in the late 1990s. "We're in the beginning of a new development cycle, with new construction starts in the outer suburbs," he said.

In Philadelphia's suburbs, the 500-room Adams Mark Hotel on City Avenue closed earlier this year, but the room supply has stayed steady with the opening of a handful of smaller hotels, each with 150 or fewer rooms, Tyson, the PKF Consulting vice president, said.

Warren Marr, a managing director with the PricewaterhouseCoopers L.L.P. consulting firm, noted that Philadelphia had done particularly well in attracting more leisure travelers since the big slump that the travel business experienced after Sept. 11, 2001. The number of individual business travelers to the city also has grown over the last two years, he said.

But demand from the leisure and individual business traveler, combined with the dwindling supply of rooms in Center City, can be problematic if the Convention Center succeeds in attracting larger meetings and trade shows, Philadelphia Convention and Visitors Bureau officials said. The city will play host to 14 citywide conventions this year and 14 more in 2006. They are the kind of gatherings that use at least 5,000 hotel rooms on their busiest nights.

Fourteen big conventions is only half as many as the city hosted in 2002, before the Convention Center's widely publicized labor costs and working atmosphere prompted many organizations that staged conventions in Philadelphia in the 1990s to take their meetings to other cities. With new management and a better atmosphere at the center now, the city is slowly attracting larger groups again.

But the conventioneers are going to need more places to sleep, close to the Convention Center, when the building is expanded, the bureau officials said.

"We could use another 2,500 rooms with expansion," bureau executive vice president Jack Ferguson said. "We want meeting planners to feel they can have room blocks right near the Convention Center."

The industry experts cited one other way the number of hotel rooms in Center City could grow, and sooner than with Convention Center expansion: Combine luxury hotel rooms and condos in the same building or an adjacent one. These lodgings give owners of condo units all of the traditional services of an upscale hotel, such as 24-hour room service.

Philadelphia already has one example of a hotel-condo combination, the Rittenhouse, and one has been proposed as an addition to the Ritz-Carlton Hotel, Marr said.

To find financing for any Center City hotel project of 300 rooms or more, he said, "if you're going to do it without public assistance, it's going to have to have a residential component."


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