PHILADELPHIA—Overshadowed by its East Coast peers in New York, Washington, D.C., and even Boston, the hotel market in Philadelphia has long been overlooked by investors. That might be about to change.
Fueled by an $800-million expansion of the Pennsylvania Convention Center that will increase its space by 60%, Philadelphia is poised to experience a boost in demand that has developers salivating.
“This expansion has been projected to add over 200,000 annual room nights of hotel demand per year, which translates to several points of occupancy for every hotel in Center City,” said Bob Webster, managing director of Jones Lang LaSalle Hotels.
The market also will benefit from several new demand generators, including the Barnes Foundation-- an educational art and horticultural institution—which is relocating to the downtown area this year, he added.
PKF Hospitality Research has stamped the city’s hotel market with its seal of approval as well, projecting it as one of the top five growth markets in the U.S. during the next four years with a revenue-per-available-room compound annual growth rate of nearly 9%.
Philadelphia ended 2011 with a 3.5% gain in occupancy to 66.2%, a 5.7% increase in average daily rate to $114.40, and a 9.5% jump in RevPAR to $75.72, according to STR, parent company of the Hotel Investment Barometer. www.str.com
That momentum has continued into 2012. The market finished February with gains of 5.4% in occupancy, 4% in ADR and 9.6% in RevPAR, respectively, according to STR.
The result is a flurry of development. There are 39 projects in Philadelphia’s total active pipeline, including eight under construction, according to STR. The total Philadelphia, Pennsylvania-New Jersey market comprises 363 hotels and 43,559 rooms.
“The mayor has publicly stated his desire for additional lodging inventory, and several hotel development projects have been announced,” Webster said.
Deal activity
For those late to the building boom, Philadelphia is likely to attract buyers looking for the benefits of surging East Coast demand without having to pay New York or Washington, D.C., prices, Webster said.
“We expect the market to remain positive as long as the economy continues to strengthen,” he added. “If hotel REIT prices continue to strengthen, the transaction market should heat up further.”
Hersha Hospitality Trust was the last big buyer to take the plunge. The Philadelphia-based REIT in early March acquired the Rittenhouse Hotel for $23.9 million, or $215,000 a key. The 111-room asset was purchased from Rittenhouse Development Corporation in an all-cash transaction.
“We are a Philadelphia-based company, so we know the market really well. In addition to the proximity of this property (being an attractive characteristic), Philadelphia is really poised to be one of the top five lodging markets in the next couple of years,” said Ashish Parikh, Hersha’s CFO.
Four other upper-end hotels have traded hands during the past two years, according to STR Analytics, sister company of the Hotel Investment Barometer:
| Hotel | Date of purchase | Price | Rooms | Buyer | Seller |
| Sofitel Philadelphia | 2 December 2011 | $87 million | 306 | HEI Hotels & Resorts | Iron Stone Real Estate Companies |
| Westin Philadelphia | 1 September 2010 | $145 million | 294 | LaSalle Hotel Properties | HEI Hotels & Resorts |
| Embassy Suites Philadelphia Center City | 1 September 2010 | $79 million | 288 | LaSalle Hotel Properties | HEI Hotels & Resorts |
| Le Meridien Philadelphia | 14 April 2010 | $47 million | 202 | Pebblebrook Hotel Trust | Goldman Sachs Capital |
Source: STR Analytics