Hotel market heats up

Wednesday, June 22, 2005 at 1:00am

Ray Waters figures the Hilton Nashville Downtown has missed out on about $1 million in revenue because of the cancellation of National Hockey League play this season. The general manger said hockey teams kept his rooms full during previous seasons.

But that only makes it all the more impressive that the 330-suite hotel is seeing its best year ever, with 75 percent of its rooms occupied on average since the beginning of the year. The Hilton has also raised its room rates about 7 percent to an average price of $148 this year, Waters said.

"Last year was the best year this hotel has ever had. This year is going to be better than last year and, had we had hockey, it would just have been better," Waters said.

In Nashville and around the country, the lodging industry is rebounding strongly from the post-Sept. 11 doldrums - with 23 straight months of operational improvements, said Patrick Ford, president of Lodging Econometrics in Portsmith, N.H., which tracks real estate trends in the lodging industry.

A return to nationwide traveling, coupled with a slowdown in new hotel construction, is fueling not only an increase in occupancy and room rates, but also a buying and selling frenzy.

"I can tell you that it's a very active selling market. There were more hotels sold [in the United States] in the year 2004 than any other year since we've been tracking it," Ford said.

Nationwide, he said, 1,881 hotels were traded last year, a doubling from the previous year.

In the greater Nashville area - which stretches south to Franklin and Murfreesboro and north to White House - 30 hotels changed hands last year, about 10 of which were the results of corporate mergers. The local transactions involved 4,117 rooms, Ford said.

Some of the most active purchasers have been real estate investment trusts (REITs) such as Equity Inns Inc. of Germantown, Tenn., which announced last month it is purchasing the 127-room Hampton Inn & Suites in Franklin for $10 million.

Also last month, Hilton Hotels Corp., which has been shedding non-core properties, sold two Homewood Suites by Hilton, including a 121-room hotel on Elm Hill Pike, to Apple REIT Six Inc. for a package deal of $17.2 million.

"I would call it very strong activity for a city the size of Nashville," Ford said.

Driving the trend are record low interest rates since early last year, the relative ease in obtaining financing, and the prospects for a recovery in hotel operations, he said.

Robert Schaedle III saw the promise of things to come more than a year ago. He left a residential real-estate partnership with $400 million in apartment assets in October 2003 to start a new company, Chartwell Hospitality Corp. in Brentwood.

Since then, Chartwell has amassed 13 hotels all over the country, including the Hampton Inn in Brentwood, with plans to buy a 14th hotel this month and build another five properties.

The company, which is pursuing mainly Hilton and Marriott brands with the goal of renovating and repositioning them, typically finances about 65 to 70 percent of its acquisitions, he said.

"There's tons of lenders out there - everything from commercial banks to credit companies to life insurance companies," he said. "And today you can borrow money between five and 10 years for anywhere from 5.5 percent to 6.3 percent, so you have positive leverage on investment."

Industry observers note that many real estate investors are preferring to buy hotels and improve them rather than construct new properties, which can take two years from the design phase to opening.

"This round, the new construction is very expensive. Land building costs are huge," Schaedle said. "So today, the new supply side of the business is slower. There are going to be new hotel starts in most markets, but there won't be the plethora of supply that occurred in some of the latter cycles."

In Nashville, for instance, the increase in the supply of new hotel rooms was slightly above 3 percent in 2000 and 2001. Supply actually decreased by .8 percent in 2003 and by 1.2 percent in 2004, according to Smith Travel Research of Hendersonville.

Only three hotels are currently slated for construction in the Nashville area, said Ford of Lodging Econometrics, including a 67-room Fairfield Inn & Suites in Murfreesboro, a 150-room Hampton Inn on Fourth Avenue South in Nashville, and a 70-room Holiday Inn Express in White House.

While supply has been lagging, more people are traveling for business and pleasure than they did in the years immediately following the Sept. 11 tragedy.

"So what that means is that there are a lot of people traveling and not that many more new rooms coming on line, so the hotels that are existing are benefiting from that trend," said Jan Freitag, director of client services for Smith Travel Research. He notes that occupancy improves first, followed by rate increases.

Pamela Wright, owner of Wright Travel in Nashville, has noticed this trend while booking travel and arranging discounts for her corporate clients.

"It's sometimes very difficult to find a room in large metropolitan areas like New York. Rates are really at a premium," she said. "And for contracts, hotels are requiring a significant amount of room usage in order to give you a deeply discounted rate."

The recovery may not have reached the levels of 2000, the U.S. hotel industry's banner year, Freitag said, "but we're making rapid strides towards getting back to an inflation-adjusted 2000 room rate."

For the first four months of this year in Nashville, occupancy rates had their strongest year-over-year gain since 2000 - increasing 4.3 percent over the same period in 2003 to an average of 59.8 percent of rooms occupied.

Correspondingly, the room rate has averaged $76.95 so far this year, up 4.1 percent over the prior year, but not quite reaching the average $74.36 rate in 2000.

The Nashville market's operational improvement rate fares a little better than the nation in terms of occupancy. The average national occupancy rate was 60 percent, a 3.1 percent increase so far this year. But Nashville's average room rate falls a bit below the national average of $90.45, Freitag said.

While the hotel industry may be celebrating its gains, consumers likely are lamenting the higher hotel bills. But Ford argues that they are actually getting more for their money. The hotels are improving bedding, bathrooms and technological services.

"The hotel companies are spending record dollars upgrading their products and setting new construction standards for hotels to come in the future," Ford said. "So the consumer is benefiting enormously, and there's a whole wave of brands to select from at different price points and quality levels."

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