Office market sparks hotel development boom in Seattle

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The Seattle market is a hot bed of hotel development. According to Lodging Econometrics, the city’s hotel construction pipeline includes 52 properties with 9,682 rooms. The hotels in the pipeline represent 22 percent of the market’s existing supply.

A strong office market, combined with rebounding leisure business, are fueling the demand for additional hotels. Online giant Amazon is relocating its headquarters to the city’s South Lake Union neighborhood, and when the transition is complete the company will have about 35,000 employees in the city.

“With its relocation and expansion, Amazon is obviously a big part of the boom in hotel demand,” said Kasia Russell, managing director and senior partner for consulting and valuation at HVS. “You also have a lot of professional services firms coming into the market, everything from law firms to engineering firms to a slew of subcontractors in the high-tech industry that weren’t in the downtown market before.”

A report from JLL said Seattle led the nation in the third quarter for office space demand. During the quarter, tenants in the Seattle-Bellevue area took about 1.3-million square feet of office space, nearly double the activity in either San Francisco or Silicon Valley.

Russell also credits a rebirth in tourism and leisure travel to Seattle as a catalyst for new hotel development.

“People are starting to realize Seattle has a temperate climate, and the city is doing a great job in marketing that advantage,” she said. “The city has done a good job introducing a variety of festivals and leisure-type events that happen in the off-season months.”

The market’s 358 hotels have performed well in 2015. Through September, occupancy for the city was 79 percent, among the highest of the 25 largest hotel markets in the U.S. During the first three quarters, average daily rate rose 9 percent, which in the U.S. was only topped by the Phoenix market at 9.6 percent growth in ADR.

Inside the pipeline

Twelve hotels with 3,348 rooms in the pipeline are in Seattle’s central business district. Another 16 properties with 2,664 rooms are in the Bellevue/Seattle East submarket.

About half of rooms in the pipeline are in the upscale (19 hotels, 3,186 rooms) or upper-midscale (13 hotels, 1,609 rooms) chain scales. There are 13 hotels with Marriott International brands in the pipeline.

While the pipeline is strong, most of the properties won’t open for several years. Eight properties are scheduled to open this year and four more in 2016. In 2017, 16 hotels with 2,558 rooms will open. The remainder of the pipeline is scheduled to debut in 2018 and beyond.

Among the biggest projects on the drawing board is a 1,500-room as-yet-unbranded hotel near the Washington State Convention Center in downtown Seattle. Developer R.C. Hendren is planning the 43-story mixed-use tower that will also include residential units and retail space. It is scheduled to open in 2017.

Visit Seattle says the new hotel is critical to attracting more business to the convention center. According to the group, Seattle has had to turn away more than $1.6 billion in convention business since 2008 due to lack of available dates or capacity constraints. Plans are also under way to double the size of the convention center with construction starting in 2017 for a 2020 opening.

 Barriers to entry

According to Russell of HVS, hotel development is strong in most segments, except for low-rated limited-service properties.

“The barriers to entry are quite high,” she said. “There is a lot of competition with residential development so any site that is potentially good for hotel development is equally good for residential development.”

The luxury segment is generally underserved in the market, Russell said.

“There is some luxury product slated to come online with a new Thompson Hotels, an SLS and a Curio,” Russell said, “but in terms of the super-high-end, Seattle is somewhat underserved.”

Photo: The Palladian, a 97-room, adaptive-reuse boutique property operated by Kimpton Hotels & Restaurants, opened in January in Seattle’s Belltown neighborhood.

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