Hotel builders find barriers to city check-in

  • Posted: February 16, 2014 – The hotel business in downtown Charleston is giving thanks and waving goodbye to its first big swell of guests this year. And as the Southeastern Wildlife Expo winds down Sunday, the industry is feeling, fittingly, bullish about the future.
Rooms are being added and refurbished on the peninsula as the rack rate and occupancy rate continue to climb higher. The proverbial rising tide is, for the moment, lifting all boats.

“Charleston is, without a doubt, a jewel in the Southeast,” said Steve Mudge, a former Ritz-Carlton and Marriott executive who’s now with Greenville-based SERRUS Capital Partners.

And like any fine gem, it seems that everyone wants a piece of it.

That was one of the prevailing themes at an Urban Land Institute hotel forum that Mudge moderated about two weeks ago at the College of Charleston School of Business.

Any hospitality company worth a lick would love to include a downtown Charleston location in its portfolio, said panelist Mary Beth Cutshall, vice president of acquisitions at Atlanta-based Hospitality Venture Management Group.

“It’s not a gateway city, but in many ways it sells like a gateway city. … There’s cachet to it,” Cutshall said.

$400 a night

That much is evident from the raft of new hotel projects that have been floated for the peninsula over the past two years. Combined, the deals could add more than 1,500 rooms to the market, stirring concerns about too much supply.

It hasn’t quite played out that way.  “If you look at a lot of them, they haven’t moved,” said Brumby McLeod, an assistant professor of hospitality and tourism management at the college’s School of Business. In the short run, some of the previously announced deals “aren’t going to happen,” he predicted.

 “Either there’s going to be a better use of the dirt or they’ll go back to the table,” he said.

Most of the lodgings that have broken ground lately are either long-planned projects or tiny boutiques seeking a niche in the upper crust of the market.

For instance, it was pointed out during the panel talk that the 50-room Grand Bohemian Hotel being built at Meeting and Wentworth streets will cost more than $400,000 per suite to complete. The industry rule of thumb is that every $1,000 in development expense adds $1 to the average daily rate.

“That suggests $400 a night, which is certainly achievable,” McLeod said Thursday.

Hotel hindrance?

The trend toward smaller, pricier projects is being driven by a combination of economics and government policy. Real estate on the peninsula is already scarce and is getting increasingly expensive. Also, the city made hotel construction an even trickier prospect by extending its 50-room limit on new lodgings farther north, to the Septima Clark Expressway.

It all elevates what developers call “the high barrier to entry” on the peninsula.

“The challenge in Charleston is finding … adequate sites,” said Vic Mills, whose Augusta-based Blanchard & Calhoun Commercial plans to open its 141-room waterfront Hilton Garden Inn on Lockwood Drive in March.

Escalating construction costs — the average quote is up to about $350 a square foot for a hotel— and stringent preservation rules make it even more difficult to pull off a successful deal.

All this is a benefit to anyone who’s already invested for the long term in the downtown lodging market.

“That helps increase value as time moves forward,” said D.J. Rama, president of Greenville-based JHM Hotels, which owns the two Marriott-flagged properties on Lockwood Drive and plans to build more rooms on the peninsula.

The rub is that those same barriers could hinder or discourage future investment by locking out full-service luxury brands that might want to expand to Charleston with a big property. Cachet comes with a cost.

The thinking is that room rates and other key lodging metrics for the city are stout enough to support a Ritz-Carlton or St. Regis should one of those chains ever decide to build in Charleston.

Whether that happens will depend largely on finding the right site at the right price.

“Again, it’s back to barrier to entry,” Rama said.

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