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Boston Hotel Occupancy Expected To Drop As Supply Flood Hits

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Boston isn’t an easy city to develop in. But the region’s tough approvals process is keeping hotel performance high, even as a wave of new supply threatens to flood the market. 

Boston Hotel Occupancy Expected To Drop As Supply Flood Hits
Group One Partners principal Harry Wheeler and Pinnacle Advisory Group principal Rachel Roginsky

“It’s not easy to develop in Boston, but what that does is it puts the city on a higher rate for occupancy and room nights, but it’s not for the faint of heart,” Group One Partners principal Harry Wheeler said last week at Bisnow’s Boston Hotel Summit. “You have to want to be here.”

The average daily rate at a Boston hotel in 2018 was $262 and occupancy was just short of 83%, according to Pinnacle Advisory Group. It appears many hoteliers are willing to endure the approvals process to achieve numbers like that — the national averages are roughly $132 and 70%, respectively, according to STR —  but the growing hotel interest comes at a cost to local hotel owners

Boston Hotel Occupancy Expected To Drop As Supply Flood Hits
Carpenter & Co. President and CEO Richard Friedman

The roughly 2,500 hotel rooms under construction in Boston and Cambridge and additional 5,600 rooms either approved or in the planning process will lower the two cities’ combined average occupancy rate from 83% to 78%, according to Pinnacle. But hoteliers say that is still an enviable performance level compared to other markets.

Group One Partners does design work for hotels, including at Boston’s new Moxy Hotel in the Theater District. Wheeler said Boston still lacks some hotel brands compared to other markets, and he thinks developers will still see reason to build despite lower occupancy projections. 

“Is 78% really that bad compared to 82?” he said.

Boston Hotel Occupancy Expected To Drop As Supply Flood Hits
CitizenM Managing Director Ernest Lee, Spot On Ventures Venture principal Robin Brown and The Mount Vernon Co. founder Bruce Percelay

Developers are also responding to changing market fundamentals. While occupancy shifts are accepted, soaring costs of construction have changed the nature of hotel design and construction, particularly at the luxury segment of the market.

While more economical hotel developers look to lower costs through modular or prefabricated construction, luxury developers have to find additional streams of revenue.  

It can cost between $1M and $2M per room to develop a luxury hotel, according to Carpenter & Co. President and CEO Richard Friedman, the developer behind the recently opened Four Seasons Hotel One Dalton. That translates to steep hotel rates, even for guests used to paying five-star prices, so adding a residential component helps bring down prices. 

“You couldn’t build that hotel without the condos,” Friedman said. “The condos subsidize the hotel rooms.”

Boston Hotel Occupancy Expected To Drop As Supply Flood Hits
Pyramid Hotel Group Senior Vice President of Acquisitions and Business Development John Hamilton

High construction and labor costs are one thing, but with the U.S. now in its longest period of economic expansion, developers and hoteliers are also having to cope with what to do when the long-awaited market correction does come. Panelists all agreed the hotel industry is usually among the first hit due to companies and leisure travelers slashing travel budgets in down times. 

“We find frequent prayer every morning works,” joked The Mount Vernon Co. founder Bruce Percelay, who developed the Revolution Hotel in the South End as well as two hotels on Nantucket. 

Boston Hotel Occupancy Expected To Drop As Supply Flood Hits
Hudson Group partner Noam Ron, Access Point Financial CEO Dilip Petigara and JLL Senior Director Alan Suzuki

Spot On Ventures Venture principal Robin Brown, a co-developer of the Omni Boston Hotel at the Seaport, cautioned developers not to over-leverage ahead of a downturn and for operators not to overly cost-cut when times get tough, because guests who do still book rooms will notice and “TripAdvisor rankings can plummet in a week,” he said. 

Given the seasonal nature of the hotel business, Percelay said every January is almost like having a recession as bookings drop following the holidays. But when an actual recession hits, survivability can often just come down to smart day-to-day business practices. 

“I honestly don’t know what you can do about it,” Percelay said. “If the tide goes out, you just have to be financially strong enough to absorb it.”