Hotel construction thrives here, but failing economy could change all that
From Downtown to the North Shore, South Side and Strip District, hotel construction has been booming in Pittsburgh.
In those areas and other city neighborhoods, 17 hotels that are under construction or planned could add more than 2,400 rooms to the existing inventory by 2010, according to a Tribune-Review review of projects announced by developers, property owners and others.
That doesn’t include a long-stalled 500-room convention center hotel in the Strip District that still hasn’t been able to get off the drawing board.
But the weakening national economy, tightened credit and the realities of increased competition eventually could derail the ongoing march of hospitality industry construction, some experts say.
It may not happen this year, but lenders and hotel operators may soon start to think twice about continuing to support some projects, experts believe.
“If you are asking if hotel construction is due to slow down, the answer, unfortunately, is yes,” said Jeff Burd, president of the Tall Timber Group, a Ross-based construction market tracking firm.
“In the downward economic cycle, the next level of erosion is going to be travel,” Burd said. “Travel already is being restricted by businesses, and travel plans also are going to be set aside by consumers. It’s probably going to be that way for 15 or 18 months.”
“We look for things to get tougher before they get better,” said Randy Smith, CEO of Smith Travel Research in Henderson, Tenn.
Smith Travel’s most recent projections show hotel occupancy nationally will end 2008 at 61.2 percent, down 3 percent from year-end 2007, and continue on a downward slope through 2009.
Another 3.5-percent year-over-year decline next year would send occupancy to 59.1 percent — the lowest level since 2003, it said.
Surprisingly, occupancy in the Pittsburgh area marketplace is holding up very well, according to Smith Travel’s statistics.
“In fact, so far this year it’s been the No. 5 market in the country as far as occupancy growth,” said Bobby Bowers, Smith Travel’s senior vice president-operations.
Through Sept. 30, occupancy in the 22,014 rooms the company tracks in the seven-county Pittsburgh region stood at 65.7 percent, up 1.7 percentage points, or 2.6 percent year-to-date, over 64 percent at the same time last year.
Pittsburgh’s occupancy to date has trailed only Lousiville among the 12 cities considered its peer competitors for conventions, meetings and other events, said Craig Davis, vice president, sales and marketing for VisitPittsburgh, the local convention and visitors bureau.
The others are Milwaulkee, Cincinnati, Detroit, Charlotte, Philadelphia, Columbus, Indianapolis, Memphis, Cleveland and Baltimore.
“Group business is way up this year, and until we’ve had these issues with the national economy and banking market, business travel has been strong,” Davis said.
For group meetings, the bureau has helped book 14,000 more hotel rooms in the city this year than in 2007, which was a record for those events, he said.
Market conditions aren’t discouraging Harmar-based Kratsa Properties, one of the region’s most active hotel developers.
Its current projects include a 177-room Marriott Residence Inn at Mazeroski Way on the North Shore and a 156-room HIlton Garden Inn at the former Allegheny County jail annex and Jones Law building site on Ross Street, Downtown.
“We have financing secured for both,” said William Kratsa Jr., general partner.
The company’s Downtown site is near government offices and major office buildings, and North Shore location is not only near PNC Park and Heinz Field, but the new gambling casino under construction near Carnegie Science Center.
Continental Real Estate Cos. is targeting the North Shore area for a hotel, a 178-room Hyatt, near Del Monte Foods local headquarters.
“The Pittsburgh hotel market still is strong as compared to other cities in the U.S., which have been impacted by the economy,” said Keith McGraw, partner with Raleigh, N.C.-based Concord Hotels.
Concord has 55 hotels in operation in the United States and Canada, including eight Marriott brand hotels in Pittsburgh. It just recently started to build 124-room Courtyard by Marriott in Robinson, and will soon start construction of a 112-room hotel at Walnut Capital Partners’ $113-million Bakery Square project in Larimer near East Liberty.
“We had a $440 million hotel portfolio sale last year so we have been able to sustain growth even with the problems in the credit market,” McGraw said. The company has a strong capital position and a positive track record with lenders, he said.
“We anticipate that 2009 in the Pittsburgh hotel market will be challenging because of the economy and impact on corporate and leisure budgets,” he said. “Hotel demand will diminish with the economy and with hotel supply increasing, the hotel market will be impacted.”
Nonetheless, a number of hotels targeting specific segments of the market will likely be built no matter what happens in the overall market, said Burd of the Tall Timber Group.
“We’ve got some uniqueness here in that we’ve got several hotels planned for very specific under-served points,” he said.
An example is a 142-room hotel planned Uptown near the site of the Pittsburgh Penguins’ new $290 million hockey arena Uptown. That project likely will be built no matter what happens in the national economy, he said.
“Also on the North Side, I think developers know with a high degree of certainty that is an under-served neighborhood,” Burd said.