For Hotel Developers, 2009 Proving to Be No ‘Shangri La’

A lending environment that is particularly hostile, and a deep recession that is severely depressing hotel operating fundamentals, are putting many high-profile lodging development projects on ice. The latest victim is the Shangri La Chicago, a 222-room hotel that was to open in the Waterview Tower at West Whacker Drive and Clark Street, along the Chicago River, construction on which is currently at a standstill.“Under the current economic environment, regrettably, the implementation of the hotel project has been suspended with no indication of when activities will resume,” the Hong-Kong-based luxury hotel company said in a statement.This marks the second time in less than two weeks that bad news about a major Chicago hotel project hit the wires. The Web site reported on February 19 that Marriott International Inc. and Monaco Development L.L.C. had terminated their management agreement for a 330-room hotel. The hotel was to carry the flag of Edition, the high-end boutique hotel brand launched by Marriott and designer Ian Schrager. With both leisure and business travel in a steep decline, lenders are casting a wary eye at new hotel development. “There is virtually no construction financing available,” said Brian Tress (pictured), executive director and area hospitality leader for Ernst & Young. And, with hotel performance metrics in free-fall, many developers are making a strategic decision to delay their projects. Many have to determine whether they have deep enough pockets to open up in the middle of a recession, or whether it is wiser to put a project on hold until the economy revives, Tress said. Since hotels lack the pre-leasing components of office buildings, obtaining hotel construction financing can be a challenge even in good times, said Bob Eaton, executive managing director of PKF Capital. Hotels need time to ramp up operations, and many large properties need to become established in their markets to attract the group business that is important to their bottom lines, Eaton said. With negative RevPar growth predicted for this year, and for a flat 2010, borrowers have a difficult story to tell, he said. Today, lenders are strongly focused on who the developer of the hotel is, because, in many instances, operating companies, while putting their brand on a hotel, do not have an ownership stake in the asset, Tress said. “The sponsor is king,” he said. “[The sponsor] has to have a long and successful relationship with the lender, has to have a great credit rating, and a successful track record developing hotels.” Many large hotel projects have added residential components in recent years, but any advantage a residential portion once added to a hotel has now largely evaporated in the eyes of the lending community. “Adding a residential component would maximize density, help pay off the construction loan, and diversify risk,” Tress said. “But developers can’t sell enough units to pay off the construction loan, and now the property has two risky elements contained in it.”