Boston & Cambridge Hotels Choose Dormitories over Dormancy – by Sebastian Colella
Article featured in Banker & Tradesman, November 30, 2020
The Boston & Cambridge lodging has ranked as one of the best performing markets in the country the last few years. Market occupancy was 82.3% in 2019, the seventh consecutive year above 80%. However, as a result of the ongoing pandemic and its impact to the Greater Boston economy, the market has faced some of the steepest declines in demand and revenue across the country’s top-25 markets according to STR. Although most hotels in the market have reopened after closing temporarily in the second and third quarters, they have done so with very little lodging demand. Given the challenging operating environment hotels have had to rely on some business it would not have considered in the past.
Greater Boston is home to over 50 colleges and universities, including Harvard University, the Massachusetts Institute of Technology, Boston University, and others, which is more than any other metropolitan area in the country. As these schools prepared to welcome back students and staff during the ongoing pandemic, many were forced to de-densify accommodations and provide additional housing for quarantining and testing. Given the lodging market’s performance the last ten years, it is unlikely hotel owners and operators in the Boston market would have considered providing room blocks at substantially discounted rates to schools for an extended period of time. However, the proposition has been viewed as a win-win for about a dozen hotels given the dramatic declines in lodging demand this year.
The majority of hotels in Boston and Cambridge temporarily closed in March or April, with an estimated 80% of the rooms supply closed in May. Although most hotels have since reopened, ten hotels remain closed representing approximately 12% of the market’s room supply, including the market’s largest hotel, the 1,220-room Sheraton Boston. In addition to these hotels closing to transient and group demand, hotels have offered up rooms to the universities and colleges for dorm use, removing even more room inventory from the market.
The needs vary by school and as such the contracts with each hotel can vary greatly from the nightly rate to the hotel services provided. Based on conversations with these hotels, Pinnacle estimates approximately 1,400 rooms being used nightly for this purpose, equating to approximately 5% of the market’s current supply. The average daily rate (ADR) for these contracted rooms is approximately $100, less than a third of the market’s ADR in October 2019. Half of the contracts run through the first semester, ending mid-November, while the other half extend through the spring semester to May or June. Given the length of these contracts and that they are contracted with tax exempt schools, the room revenue is not subject to state or local lodging tax.
Although these students are not receiving the typical college experience, they are being housed in some of the city’s nicest hotels, many of which are branded, full-service hotels which have implemented elevated cleaning standards. With occupancy levels as low as they have been this year, these hotel rooms would have most likely gone empty. Agreements with the colleges have enabled hotels to generate some level of income during Q3 and Q4 of this year while also bringing some furloughed employees back to work. If demand remains at these levels, hotel owners will continue to seek out college and university dorm agreements as one way to generate revenues.
Pinnacle Advisory Group’s projections for 2020 and 2021 are outlined below.
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While reported progress in vaccine development is welcome news, especially to industries which rely on travel and leisure, there remain numerous unknowns as to when and how the global economy will return. As a destination and as an economy, the Greater Boston area is built around education, healthcare, high-tech research, and financial services all of which are equally stable and strong demand drivers. Matched with a highly skilled workforce, robust tourism and conventions, and the strength of Boston Logan International Airport, the market is well positioned for a recovery once the country begins to emerge from this pandemic. Until this time, both hotels and colleges will benefit from the use of hotel rooms as dormitories.
Sebastian J. Colella is a Vice President with Pinnacle Advisory Group based in the Boston office. Sebastian has over 15 years of experience in the hospitality industry.
Pinnacle Advisory Group. Founded in 1991, Pinnacle Advisory Group is considered to be one of the top hospitality consulting, advisory, and asset management firms in the country. Since inception, Pinnacle has provided advice on more than $50 billion of hotel real estate. The Pinnacle team consists of some of the hospitality industry’s most seasoned professionals. Pinnacle’s services include asset management, feasibility studies, workout strategies, acquisition due diligence, litigation support, appraisal and valuation, operational reviews, operator/franchise selection and contract negotiations, financial diagnostics with sensitivity analysis, and other advisory support to hotel owners and lenders. (www.pinnacle-advisory.com)