Construction, Real Estate, and Travel & Tourism

Developers pivot toward hotels

With residential units flooding market, companies look to diversify portfolio.

April 21, 2017
| By Pat Evans |
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Warner Tower
Orion Real Estate Solutions nixed a traditional residential component in its Warner Tower project and replaced it with a 12-story Hyatt Place. Courtesy Orion Construction

Developers briefly are pressing pause on downtown apartments and turning to hotels.

Multiple hotel projects surfaced the past several months, including Orion Real Estate Solutions’ Warner Tower, CWD Real Estate Investment’s 50 Monroe announcements and the breaking ground of Suburban Inns’ Embassy Suites on North Monroe, a project first announced a decade ago. 616 Development’s Derek Coppess mentioned on the GRBJ Podcast that a hotel could be incorporated in the Studio C! movie theater project.

A 110-room Homewood Suites by Hilton opened last year in the Waters Building.

The wave of downtown hotels comes as developers and lenders alike wait to see how the past few years of apartment projects are absorbed by a once underserved market, said Justin Karl, commercial loan officer with Mercantile Bank.

There still is a widely held belief downtown Grand Rapids can sustain more residential units, but the absorption will be spread out over a longer period than had been thought, Karl said.

“This is a little wait-and-see attitude,” he said. “The absorption has been pretty good, but people heard the demand for apartments, and assumed Day 1, they’ll be full. You read the initial market reports that suggested the demand was there, it is playing out that way.”

Until the apartments in the works are fully digested, banks have transitioned to diversify their holdings while additional pent-up demand for apartments is revealed.

With Kent County at record hotel occupancy rates and visitors often pushed to outlying communities, additional downtown hotels were a logical next step. The county has had seven straight years of hotel revenue growth with occupancy rates near 70 percent, according to previous Business Journal reports.

Orion’s Warner Tower, currently a surface parking lot at 150 Ottawa Ave. NW, ran into some hurdles when one of the two planned towers was residential. Through discussions internally and with lenders, Orion altered the plan to include a 12-story Hyatt Place hotel.

The hotel will sit next to the project’s 14-story office tower, anchored by the law firm Warner Norcross & Judd. The development also is blocks away from several other Orion apartment projects in the downtown area, including Arena Place, Venue Tower and River’s Edge, which recently broke ground.

“All of these projects have a major housing component, so it was a strategic move to balance our portfolio, reduce risk and deliver a project that still creates a huge economic impact and adds vitality to the urban core,” Orion spokesperson Jason Wheeler said. “Each project is different and has a unique set of variables that dictate the risk factor, the affordability and the potential for success, so when we analyze each opportunity, we will have to take into account the amount of new housing in Grand Rapids.”

Wheeler said the switch was not because of poor absorption of the current apartments or those coming online, with Arena Place 100 percent leased and Venue Tower pre-leasing and finishing construction within the next 45 days. Other Orion projects in near neighborhoods, including Fulton Square and Gateway at Belknap, also are filling up at a steady clip, Wheeler said.

Like Orion, Karl said the banks lending to hotel projects also are trying not to overexpose themselves to one asset type.

At 50 Monroe, CWD had planned for a hotel for more than five years. The official announcement came in February a 130-room AC Hotel by Marriott would open in the renovated century-old building. The hotel will be operated by AHC+Hospitality.

CWD Managing Partner Sam Cummings said the rise of hotel developments largely is connected to the destination study released in October 2016 by Grand Action and Experience Grand Rapids, along with the occupancy rates. Among the findings in the study performed by outside consultants was the suggestion for a hotel with up to 500 rooms and event space.

Cummings said lenders have tapped the brakes on residential developments, forcing the hand of developers.

“Developers can’t just go play golf, you have to follow the money,” Cummings said.

Opening first is not a concern for Cummings when it comes to the other hotels readying to be built. Cummings stressed fundamentals and quality, and a guest at a hotel doesn’t look at a CWD hotel and view it as a reflection of the company but as a reflection of the community.

“We want what’s best, and we’re dedicated to making sure what we build contributes to the short and long term of the city and West Michigan,” he said. “The Great Recession taught fundamentals trump first. Stuff that shouldn’t have been built was hurt the worst, and the product with best fundamentals was ultimately fine.”

Karl said most of the hotel projects he has seen are tied to good fundamentals.

“The names coming out are some of the most well-respected developers and have good locations and hotel flags,” he said. “They’re partnering with good investors, and it makes a lot of sense. That’s the new thing while we wait for apartments to absorb and demand to refill.”

Aggressive apartment development could return in the relative near future as the banks fill up on hotel exposure, but Karl also mentioned rumblings of additional office projects popping up in the near future.

“Everyone wanted to hit pause, and it’s not across the board, but a lot of banks wanted to watch apartments absorb and see loans stabilize,” Karl said. “Overall, we have a city and community building a vibrant downtown, and with that, you have all of them.”

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