Hotels are making more money than ever in Boise.
In June and July, customers paid almost $6 million more for hotel rooms inside city limits than they did in the same two-month stretch a year ago. The growth is due to big increases in the hotel industry’s two key indicators: occupancy and rate.
Occupancy is the percentage of available rooms that customers book. Rate, of course, is how much customers pay.
In June 2014, customers occupied 75 percent of Boise’s hotel rooms and paid an average of $88.84 a night per room, according to figures collected by the Greater Boise Auditorium District, which charges a 5 percent tax on room rentals inside its boundaries.
A year later, occupancy was 85.5 percent, with an average daily rate of $103.56. July saw similar increases in both measures, though not quite as impressive.
June and July weren’t anomalies. Boise’s hotel market has been heating up for years. As fall comes, the numbers will decline, as they always do this time of year. But they’ll be better compared to last year and the years before that.
This is great news for people who own hotels, and it’s caught the attention of developers who want to get in on the fun. This year, after a decade of scarce hotel development in Boise, a handful of local and out-of-state developers have unveiled plans for six Downtown hotels. Their expected completion dates range from 2016 to 2017.
The downside is one of those good problems, but it’s still a problem. When it’s hard to find rooms, it’s hard to attract certain types of business, said Bill Connors, president and CEO of the Boise Metro Chamber of Commerce.
Last year, for example, a group of 200 airline executives wanted to hold a conference in Boise, but they couldn’t find enough hotel rooms that offered the services and location they wanted, Connors said. “So they went to another city,” he said.
That’s an event Connors and Chamber members would have dearly loved to host here. Not just because of the event itself, but because it would have given Boise leaders a chance to show off the city to an industry they’re courting aggressively.
“One of our other big priorities is to bring more air service to Boise. Well, who better than to have 200 airline execs walking around Downtown to be able to pitch that message to?” Connors said. “It makes our pitch to them easier once they’ve seen how Boise’s grown, they see the corporate headquarters that are here, they see, ‘Hey, this is a marketplace we ought to pay more attention to.’ Now, I can call them up on the phone and say that. But if they’re actually here and seeing it, and they see the cranes in the air, it makes it a lot easier for me to make that pitch.”
Connors believes the loss of the airline conference wasn’t isolated.
“We’re losing business because we just don’t have the hotel stock,” he said. “The stock we have is great. It’s great product, and everybody wants it and that’s great, but we just don’t have enough of it.”
Connors expects hotel demand to increase as companies such as Albertsons and J.R. Simplot consolidate their corporate offices in Boise. With WinCo Foods headquarters already here, he said, the city could become known as a “grocery mecca.”
“So don’t tell me that Kraft and PepsiCo aren’t going to be needing to come to Boise on a regular basis,” he said.
But does Downtown Boise really need six new hotels that would come close to doubling the current supply of rooms?
The answer to that question depends on whether you’re talking to someone who sells hotel rooms or someone who sells conventions.
Pat Rice says yes.
As executive director of the auditorium district, he works to bring conventions and other events to Boise Centre, the venue that GBAD owns on The Grove Plaza in Downtown Boise.
A tight supply of hotel rooms is complicating that mission because the incoming groups want to make sure their people have rooms, preferably close to Boise Centre. And Rice thinks meeting the demand is going to get harder. The district is about a year from opening an expansion of Boise Centre that will enable the district to host events of up to 1,000 people instead of the existing 400.
In a study released in June, PKF Consulting concluded that Boise is losing convention business becayse of “the lack of available group room blocks at a single, convention headquarter hotel.” The new hotels would help — if they actually get built, according to the study.
“As these are proposed hotels, it is unlikely that they will all be completed, thus suggesting that there may not be enough to rooms to meet forecasted demand over the next six years,” the study says.
Besides, Rice said, there’s precedent for this kind of spurt in hotel building. In 1996, Boise added several hundred rooms through new hotels, such as the Courtyard by Marriott on Broadway, and expansions of existing ones. The early to mid-2000s brought another building boom when the Hilton Garden Inn on Spectrum Street and Residence Inn near Boise Towne Square mall went up.
Each time, occupancy and room rates dropped temporarily, but the market absorbed the additional supply. Rice believes it will be no different this time, even though the projects are concentrated in Downtown.
Besides high occupancy and room rates across the board, he said, a lot of travelers who want to stay Downtown are instead staying in Boise’s outlying areas. Several hundred rooms could shift that scenario.
“People who are staying ... maybe even as far out as Meridian, and have wanted to stay closer in to Downtown, that’s where I think you’re going to see the biggest backfill, so to speak,” Rice said.
David Johnson has a different perspective.
The co-owner of the Riverside Hotel in Garden City and the Hilton Garden Inn in Eagle said he’s not really surprised by developers’ sudden enthusiasm for projects because the hotel industry is cyclical by nature.
On one hand, Johnson isn’t happy about six new competitors watering down a market that’s been very favorable to him.
“I’m hopeful that a couple of these don’t get built,” he said.
The 300-room Riverside is one of the hotels catching spillover business when the Downtown hotels fill up.
But Johnson also sees the growth of Boise as a good thing, even if it does attract competitors. In the long run, he said, more conventions and buzz Downtown will benefit not only businesses there, but also the health of the area as a whole because it will make the city a more desirable destination.
The true market for Downtown hotels is hard to predict because building more supply will generate more demand, said David Wali, executive vice president of Gardner Co. The company is building the Boise Centre expansion as part of the larger City Center Plaza project and is working through an agreement with GBAD in which Gardner would acquire the five-acre lot between 11th, 13th, Front and Myrtle streets and build two hotels, a parking garage and condominiums.
“Unfortunately, it’s definitely a chicken-and-egg question, because until you have the rooms, the people can’t come visit you for certain-size events,” Wali said. “In short, if you didn’t have 10,000 rooms in New York City — it’s more than that — you couldn’t get that many people to come stay because you wouldn’t have the rooms for them.”
The raw number of rooms that come on line isn’t the only issue, Wali said. The type of room matters, too. In that way, he said, the hotel market is similar to the market for fast-food restaurants.
Some people like McDonald’s. Some people hate McDonald’s and love Jack in the Box.
“No one can say that we don’t have too many burger places in the world. We do,” Wali said. “But there are people that enjoy one over another, much like there are people that have allegiances when they travel to one (hotel) flag over another.”
Lenders, which provide construction money, will play a big role in how many of the proposed hotels are built.
As each project matures, bankers and investors will keep an eye on them to make sure the hotels they’re being asked to back are viable. So the competition is a race, not just a comparison of products, said Rob Perez, president and CEO of Northwest Bank in Boise. The earlier the project gets moving, the easier it is to finance.
“Let’s say that four of these hotels are under construction. The fifth guy is going to go to his bank to say, ‘Hey, I want to do that.’ And they’re going to say, ‘Well, wait a minute. There’s four hotels going on ... and there was room for 500 rooms, and 700 are in the process of construction. I’m not interested,’ ” Perez said. “So clearly, first to market or earliest to market is important, because that can impact the flow of capital.”
Overall, Perez is impressed with the credentials of the developers behind the hotel proposals. Despite his skepticism about where lenders will stand, he said, the financial strength of companies such as Gardner and Boise’s Rafanelli and Nahas bodes well for their eventual success.
“We’re getting to a peak building time in the cycle, but that doesn’t necessarily mean that we’re going to end up with a bunch of hotel foreclosures in the offing,” Perez said “These guys have the financial wherewithal, staying power, the managerial wherewithal to weather an overbuilt scenario for a very reasonable period of time.”
Wali predicted developers will need lots of cash to make their Downtown hotel dreams come true. That’s because hotels typically are financed through a two-phase system.
The first phase is a bank loan that might have a term of three years — enough to get the project through construction and to the point it’s making enough money. That loan would cover a certain percentage — say 60 percent — of the construction cost. The developer would pay the remainder in cash.
During the three-year term, the developer makes interest-only payments on the loan, then secures longer-term financing — maybe 10 years — to pay off the first loan. If that second phase of financing isn’t available, the developer has to negotiate an extension with the first lender, give up the property to foreclosure or come up with enough cash to pay off the debt, Wali said.
Before any of that happens, the bank tries to make sure the amount of money it lends doesn’t bring unacceptable risk, in case the developer can’t follow through with second-phase financing.
Again, speed is crucial. Developers who are late to the game might have to put up more cash to convince lenders to back their projects.
“I would say that as long as everybody has enough capital, (the six hotels) will all get built,” Wali said. “Because the banks will just adjust their risk thresholds to the deals at hand.”
Perez believes the wobbly state of the world’s investment markets could make hotels more attractive.
In a time of roller-coaster returns, he said, a tangible asset could feel safer to some investors. That could push them — as well as the brokerages they employ — to boost the share of hotel money in their portfolios.
“There’s an argument to say that, like a lot of investment decisions, ‘It may not pencil today, but I’m making a long-term decision because I believe in the long-term growth of the Boise market,’ ” he said. “And that’s fine. The challenge, though, is will the capital flow on the basis of long term?”
Developers might make a similar calculation, Wali said. The Boise market will absorb hotel capacity, even if it’s overbuilt in the short term.
Some might be willing to part with millions in cash and take on a complicated project, even if they won’t realize profits until years down the road, he said.
“If you’re working for a family who plans to own assets forever in a market, does what happens in the next five years matter as much as what happens over a 30-year period?” Wali said. “If you’re an individual developer who’s in his late 50s who might do one more deal and plans to sell it upon stabilization or maybe in 10 years, that’s entirely different.”