The dual-branded W and Element hotel tower that recently claimed a central spot along Center City’s skyline was seen as another engine for Philadelphia’s growing prosperity, conceived to house an influx of new visitors drawn by the city’s soaring cultural clout and expanding convention business.
Now those conventions and tourist visits have fallen victim to the coronavirus pandemic, and the 51-story tower at 15th and Chestnut Streets seems bound to open its doors to a city awash in new hotel rooms for a diminished number of guests. The W and Element hotels, both brands under the Marriott International Inc. corporate umbrella, are now expected to open in August, two months later than previously planned, according to their websites.
A rough start would come at a sensitive time for the property’s development team, led by businessman Brook Lenfest, which still owes hundreds of millions of dollars borrowed to build the project.
The W-Element is the largest among at least four major hotel projects — ones with more than 100 guest rooms — throughout the city that collectively owe outside lenders more than $280 million in construction debt, according to an Inquirer review of hotels that have either opened since the beginning of 2017 or have publicized opening dates in the coming months.
Construction debt could prove less desirable for banks to keep on their books as they deal with the pandemic’s economic consequences, which may put a squeeze on those mortgages, said Christophe Terlizzi, who heads KeyBank’s commercial real estate practice in the region.
“Many hotels are unable to pay operating costs and thus debt service,” Chip Rogers, who leads the American Hotel & Lodging Association, said of the nation’s hotel operators. “This will cause a snowball effect of foreclosures followed by lenders taking ownership of severely distressed assets with no ability to operate them.”
At the very least, projects that are slated for construction, but have not yet broken ground, will now face delays, said Billy Procida, whose Englewood Cliffs, N.J.-based Procida Funding & Advisors is active in Philadelphia and has financed hotel projects in New York, New Jersey, and Connecticut.
Projects in the proposal stage include Peebles Corp.'s long-planned restoration of the historic former Family Court building on the Benjamin Franklin Parkway into a high-end hotel, the conversion of the onetime Blue Horizon boxing venue on North Broad Street into a “micro-hotel” under Marriott’s millennial-focused Moxy brand, and what’s being called the Blu Ivy, a boutique hotel at the site of the shuttered Midtown II restaurant at 11th and Sansom Streets.
“If you didn’t dig a hole yet, you’re not closing on a new construction loan until next summer,” Procida said. “The world’s got to stabilize before we bring on new supply.”
At least eight organizations have canceled conventions or other big events planned in Philadelphia, each with as many as 70,000 anticipated attendees, between mid-March and early June, including meetings of the American Psychiatric Association and the NCAA men’s lacrosse championship, according to the Philadelphia Convention & Visitors Bureau.
Occupancy at hotels in Philadelphia and the surrounding Pennsylvania and South Jersey counties fell to 22% during the week ended April 4, down from 71% during the same week a year ago, according to the hospitality-industry tracker STR Inc. Revenue per available room, a standard metric used in the hospitality industry to gauge hotel performance, fell 82%, from $93.97 to $17.42, during that time.
The downturn comes in the midst of a hotel building boom that has added nine new major hotels to the city since the start of 2017, according to data from Visit Philadelphia, the city’s tourism-promotion agency. That includes the W and Element hotels, and the Canopy by Hilton at the historic Stephen Girard Building on 12th Street south of Market Street. Those hotels have not yet begun operations, but list opening dates on their websites.
Together, those nine properties will have contributed 2,302 new guest rooms to central Philadelphia’s inventory, an increase of 21% over the 11,039 rooms prior to 2017.
“We have a lot of supply right now,” Visit Philadelphia chief executive Jeff Guaracino said. “And we have no travel demand.” He said it’s going to take a “herculean challenge” to lure travelers back to the city once the health crisis passes.
Not all properties with construction debt face the same headaches from those loans.
The Canopy, which is accepting reservations starting in early June, is being built by Washington-based National Real Estate Advisors LLC — a subsidiary of the International Brotherhood of Electrical Workers’ pension fund — with a $72.5 million loan from Ullico, the Union Labor Life Insurance Co., with which it has a decades-long relationship.
“In these difficult times, Ullico and the NREA stand together in ensuring the success of the Hilton Canopy hotel,” Ullico spokesperson Cori Houlihan said.
The owner of the Fairfield Inn & Suites at 13th and Spruce Streets, Philadelphia’s Wankawala Organization, may also be on sounder footing than some peers because it secured its $11.8 million in construction debt to redevelop the former Parker Spruce Hotel through the federal EB-5 program, which offers U.S. visas to overseas citizens who invest in big, job-creating projects in this country.
Overseas investors are less equipped to take on the administrative tasks that would accompany a foreclosure than domestic funders, so are more likely to extend forbearance, said Gary Friedland, who specializes in the EB-5 program as a scholar-in-residence at New York University’s Stern School of Business.
Wankawala is working on deferments with its lenders, managing director Mihir Wankawala said. The operator also has a deal with the city to house at the hotel local first responders exposed to, or infected with, the coronavirus, officials said.
It isn’t only newer hotels with construction debt that are running into trouble with their lenders: Earlier this month, a mortgage backed in part by the former Courtyard Philadelphia Downtown hotel near City Hall was assigned to a business that manages troubled commercial loans, raising some doubts about its ability to avoid default by extending that mortgage.
But it is new and soon-to-open hotels that are likely to face the most scrutiny, largely due to their construction loans, said KeyBank’s Terlizzi.
Such loans are extended based on unproven expectations of a hotel’s success, so the projects have no track record of performance during normal times on which a lender can base calculations of future profitability, Terlizzi said. Some lenders could see it as a safer bet to sell their mortgage-agreement — or “note" — to a potentially foreclosure-minded investor if borrowers miss payments, rather than offering borrowers forbearance, he said.
“If a lender has two hotel loans on its books during this pandemic — one being a construction loan and the other being a permanent loan — that lender is likely more concerned about the construction loan,” Terlizzi said. “Given the lack of visibility as to future-performance expectations, that same lender might be more inclined to unload the construction loan via a note sale than to struggle through a protracted period of uncertain recovery.”
The developer of the Aloft Philadelphia Downtown hotel at Broad and Arch Streets, a venture involving the Philadelphia-based developer Realen Properties Inc. and HRI Properties LLC of New Orleans, borrowed $27.9 million from Capital One Financial Corp. that hadn’t been paid off or otherwise satisfied as of March 11, the most recent date for which records were available.
Realen chief executive Dennis Maloomian declined to comment on the loan. Capital One did not respond to messages seeking comment.
Philadelphia’s Parkway Corp. and Washington-based Modus Hotels, meanwhile, borrowed $38.5 million for their Pod Philly hotel project at 19th and Ludlow Streets from Bank OZK, previously Bank of the Ozarks, in Little Rock, Ark.
Parkway president Robert Zuritsky declined to comment on interactions with the lender, calling them “a work in progress.” A Bank OZK spokesperson also declined to comment.
And the developer Hospitality 3 of New York borrowed $35 million from HSBC Holdings PLC for the Study at University City hotel at 33rd and Ludlow Streets.
A Hospitality 3 spokesperson did not respond to messages. An HSBC spokesperson declined to comment.
The biggest construction debt burden by far, though, is held by the developers of the W and Element tower, which was developed with a collective 755 guest rooms and more than 45,000 square feet of meeting space to serve as a home base for big meetings and conventions.
Brook Lenfest’s Chestlen Development LP was lent $180 million by Barings, a unit of Massachusetts Mutual Life Insurance Co., during the project’s construction. It also borrowed $17 million under a federally guaranteed loan program and a combined $106.5 million from on- and off-shore private entities with which it shares a Conshohocken mailing address. (Brook Lenfest is the son of the late H.F. “Gerry” Lenfest, who founded the Lenfest Institute for Journalism, owner of The Inquirer.)
Having MassMutual as its lender may offer the tower’s ownership group some security: Such insurers are prosperous enough to meet their obligations during a downturn without shedding assets, said Tim Zawacki, principal analyst at S&P Global Market Intelligence.
“We would anticipate that most life insurers would be predisposed under the current circumstances to attempt to work with borrowers to restructure loans when feasible,” he said.