How has the Covid recession has hit the world of property development in Portland? While no one wants any more hotels, you can still build residences.
Urban Development + Partners found out the hard way last spring when the seven-story, 150-room hotel it had slated for 550 S.E. Martin Luther King Jr. Blvd. proved unviable. (The city had approved the original design in 2017.) COVID has knocked out business travel. In 2020 we entered an age where Zoom is your business class ticket, your swivel chair is your suite, and a La Croix from your fridge is your open bar.
However, Portland is still a net in-migration city with west coast cachet, and people still need apartments — especially in the close-in east side.
Urban Development + Partners contracted with GBD Architects to design the hotel and now the plan B structure, a seven-story residential tower. UD+P will also hire the general contractor to oversee construction and then will lease-up and manage the property “from inception to stabilization,” said Sarah Zahn, director of development at UD+P.
Zahn told the Business Tribune, “The market is a bit of whiplash right now. We’re pivoting from a hospitality project to a residential project.”
UD+P decided to nix the hotel early in the pandemic. Raising capital for a hotel suddenly proved very difficult.
“It was positioned to start construction on the hotel that we had designed in late summer, early fall, and we felt not confident that the market would support depth for a hospitality project on that timeline,” she explained, adding, “We made the decision at that point to abandon the hospitality project in favor of doing apartments really as a market-driven decision.”
Reopening a long way off
The 550 MLK property is close to two other UD+P projects. One is right next door, the 57-unit Hotel Grand Stark, a historic hotel renovation currently underway at 509 S.E. Grand Avenue (the former Schleiffer Furniture store site, which is opposite the Washman carwash). The Hotel Grand Stark is set to open in May or June of 2021. The other, called District Office, is the new cross-laminated timber office building located at 525 S.E. Martin Luther King Jr. Blvd.
According to Zahn and other market experts, even the small Grand Stark hotel (in the Schleiffer space) will have a slow ramp-up. A larger hotel would be a much more challenging prospect.
“I do believe Portland will regain its mojo as both a destination for tourists, for business and group travel. But even post-COVID business travel will take some time to recover. Analysts in the hotel and hospitality world are saying 2023, 2024 is when we’ll be back to sort of pre-COVID levels.”
The pivot to residential was driven by what Zahn calls “Looking at the financing horizon for a larger hotel project in a market where Portland has seen quite a bit of hotel activity in the last couple years.” (UD+P has been in a long-term land lease with the owner of the 17,922-square-foot lot and may acquire the land in 2026.)
Since 2012, Portland has been opening boutique hotels at a clip, but the great white whale is the Hyatt Regency Hotel at the Oregon Convention Center. This 600-room beast saw barely any convention activity before travel ground to a halt last March.
According to STR (Smith Travel Research), which tracks hotel activity, the U.S. average hotel occupancy rate was just 37.0% during the typical humdrum week of Jan. 3 to 9, 2021, down 28.3% from the same week a year ago, which was still considered “pre-COVID.” The national average daily room rate was $87.97 (down 27.1% on the year before).
Zahn says the hospitality world is divided, “drive-to” destinations, such as properties on the Oregon coast, “have been doing fairly well, because people are dying for any way to get out of their little house or apartment for a long weekend.”
Hotels focused on business travel are not doing well, and the last to bounce back will be hotels concentrating on large groups. “I’m thinking about the hotels that cater to large conventions and big business groups. When are people going to feel comfortable coming back into a 20,000 person convention where they’re eating at a buffet with thousands of people in a ballroom? We’ll get there, but I think it will take that will be the last.”
Switching from a hotel to apartments does not cost much more, construction-wise. It’s still a wood frame building. Hotel interiors are more costly than those for apartments.
“In a hotel, you’re buying beds, and televisions and all the furniture for every single room, and you’re not doing that in an apartment. But also, in an apartment, you’re building out a full kitchen, and you’re not doing that in a hotel room. So, there are different costs,” she said.
Collecting the revenue is a different business model entirely.
“We were not a hotel operator, I will say that,” adds Zahn. “We do manage our own residential properties and commercial properties, but we are not a hotel operator.” They had planned to use the Pali Hotel group of Los Angeles.
“We would have hired for this project of third-party hotel operator, to be really in charge of the day to day budget.”
They expect the apartments will appeal to a “mid-level demographic in terms of age, probably a lot of singles and couples.” She cites the Eastbank esplanade’s proximity, shopping on Division and Hawthorne, and inner eastside employment opportunities.
Urban Development + Partners also owns and manages the Slate apartments at the Burnside Bridgehead, and expects much the same demographic: young professionals.
“We’re designing this building to have nice amenities and to be a secure building.”
Marcus Lima, associate principal at GBD Architects, points out one recent rule change. For a few blocks along MLK and Grand Avenue, the sidewalk will go from 12 feet, the standard downtown, to 15 feet. New buildings will have to step back.
“MLK is now designated as a pedestrian street. That’s quite interesting. MLK and Grand are designed now to be the spine of the district.”
The city wants wider sidewalks to accommodate restaurant tables and more space for pedestrians.
“Sarah has had to dedicate three feet of property, out of the kindness of her heart, to the city, essentially,” Lima jokes.
Both are confident the new apartment building will fit in. The neighborhood has long been a mix of a historic district and a warehouse district.
“One of the interesting challenges that Marcus and his team have for a residential project is that it needs to straddle to two districts and be compatible with that with the design precedents in those two districts,” said Zahn.
THE FUTURE OF WORK
Urban Development + Partners is also working on a hotel project at North Anchor in Lake Oswego, on land owned by the city, set to open in mid-2023. “We feel confident about that one,” said Sarah Zahn, director of development at Urban Development + Partners.
“My opinion, not based on any facts, is that business travel, taking a flight across the country for one single meeting, if not over, is changing. People are going to be a lot less likely to do that because they found they’re able to achieve a lot on a video call than flying across the country to make a sales call to a single client.”
She added, however, there will be an eagerness to get back to meetings where people can look each other in the eye, but they might stack more meetings together to make the trip worthwhile.
“I will also say that people’s memories are short, right? In a post-COVID vaccinated world, I think we’re more likely to see a lot of returns to a pre-COVID norm.”
Reporter, The Business Tribune
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