Several factors are driving the development, including demand from convention-goers at the Boise Centre, which is currently undergoing a major expansion, as well as the greater number of businesses that now call Boise home, which has fueled travel and hotel stays from employees from other markets. Another factor is the desire by the national chains, or “flags,” such as Hyatt, that want to add properties in the downtown core where they haven’t previously had a presence.
For convention organizers, the ability to obtain a large block of rooms under one roof should no longer be a limitation thanks to these new hotel properties, which include:
• The 104-room, seven-story Inn at 500 Capitol, an upscale boutique hotel located on the southeast corner of Capitol and Myrtle scheduled to open in December
• The Marriott Residence Inn on the northeast corner of Capitol and Myrtle, a 10-story extended-stay hotel with 186 rooms, slated to open in early 2017
• The 150-room Hyatt Place on Bannock between 10th and 11th streets, with an expected opening in early 2017
Combined, the three projects add 440 rooms within easy walking distance of the Boise Centre and downtown amenities. The timing of the first new hotels since 2008 is ideal, as the Boise Centre nears completion of the addition of 38,250 net square feet of meeting and event space.
Impact on the market. We expect that both the occupancy in the new hotels and the room rates will be quite strong as people are typically attracted to and willing to pay higher rates for new product.
The financial success of the new hotels will be measured by two factors: average daily rate, or ADR — defined as the average rental income per paid occupied room in a given time period — and occupancy. For existing hotels, both ADR and occupancy likely will be impacted by the new capacity coming online.
Let’s assume that the ADR in downtown Boise is $140 but then another 500 rooms are added with an ADR of $160. If the existing rooms want to maintain occupancy they likely will have to lower their average daily rate or offer other amenities or specials — such as free breakfast — to attract and retain travelers. They may even choose to refurbish the property in order to command a higher ADR.
Think of it like the hot-and-cold faucets on your bathtub and how you adjust the amounts of each to create the ideal temperature. Similarly, the hotels in the Boise market will need to find the proper balance of ADR and occupancy once the new capacity comes online.
Some may maintain their ADR regardless of how it impacts occupancy. Others, looking to maintain occupancy, will lower their rate, but understanding there are limits to how low the price can drop and still cover the cost of providing the room.
In addition, there is cyclicality in hospitality, with typically lower demand in January and February and peak season in summer and fall. Performance has to be measured through those peaks and valleys on a trending basis, which typically encompasses the previous 12 months.
From a financial perspective, creditors will typically consider two metrics: debt service coverage ratio (net operating income divided by debt) and/or debt yield ratio (net operating income divided by loan balance). If specific thresholds for each are consistently met, it provides proof that the market can sustain the new hotel property at the performance levels that creditors require.
Once the market has absorbed and digested the new supply, and we can review the resulting performance, we can assess whether demand will continue to exceed supply, thus driving the financial performance needed to keep both the property’s owners and creditors happy. In cases where new hotels are rising in Boise’s epicenter, it’s possible that the new supply will cannibalize some of the hotel room business outside the downtown core because travelers will opt to stay in the newer properties close to businesses, shopping, restaurants and other amenities.
The new hotels will complement the ongoing growth of and interest in downtown Boise. With the new hotel capacity available, the expanded Boise Centre will continue to be able to proactively market their facility and the city of Boise as an attractive, safe and convenient convention venue for years to come.
Wes Jost is senior vice president and regional director of Zions Bank’s Idaho Real Estate Banking Group. He can be reached at 208-501-7491or Wesley.Jost@zionsbank.com.