Nashville hotel developers take hit but keep building

A banner hung from the upper floors of the old American Trust Building on Union Street hints at the conundrum faced by developer Mark Lineberry.

Against a blue background, the banner announces his latest project, a downtown Hotel Indigo, with a haiku: "Awake to Music/The Inspiration Begins/2007."

But as the calendar flips into 2009, Lineberry and his partners remain months from completing the project. After five years of planning, setbacks and, finally, the start of construction, it wasn't their intention to build a business hotel during a recession.

But, in the end, that turned out to be unavoidable.

"We had kind of bit in so hard we didn't want to stop and take a loss," the Mt. Juliet developer said last week. "You've got to carry it through."

Office buildings, shopping centers and even condominium developments have slowed as the nation's economy grapples with recession. But one type of project that appears to be pressing along here despite the financial turmoil is hotel construction.

With at least one new project starting up and several old ones wrapping up in Midtown, downtown and Cool Springs, hotel developers are banking that demand from business travelers will hold up even as the broader economy sputters.

Nashville hotel managers are among the few in the country who have been able to keep room rates up so far even as occupancy rates have edged lower. (See graphic at right.)

But plenty of risk remains over the next year or so, several developers and industry observers said. Most expect economic conditions to deteriorate well into 2009, and as they do, Nashville's newest hotels will feel pressure with the possibility of more empty rooms and lower nightly rates.

"It just costs less to finish and start receiving revenue," said Walt Baker, executive director of the Greater Nashville Hotel & Lodging Association. "Even if they lose money in the market now, they're probably going to lose less than if they stopped."

Lineberry's project is emblematic of the difficult situation.

There were two Hotel Indigos planned for Nashville — the first opened on West End Avenue last year. Lineberry and his partners were on the verge of starting to build the second in 2007 when their lender, Alpharetta, Ga.-based Integrity Bank, collapsed.

The group arranged new financing from BB&T, but by the time construction work finally started this fall, evidence of a recession was undeniable.

Nashville market viable

Still, Lineberry sees some reasons to remain optimistic. While occupancy is down across the country, Nashville is one of a handful of major lodging markets where room rates are still growing.

"It's not like it fell off a cliff here," Lineberry said.

Lineberry also believes his hotel will hit an untapped niche. The quirky, boutique-style Hotel Indigo is aimed at business travelers, especially younger ones, who want an upscale room in a convenient location and are uninterested in 24-hour room service and other expensive amenities.

Many of the other projects under construction take a similar approach. The Courtyard Franklin Cool Springs, a Marriott-branded property, boasts proximity to downtown Franklin and a "refreshing business" style that it says is meant to encourage socializing among business travelers.

Meanwhile, the Hutton Hotel, which opens next month on West End Avenue, says it will offer easy access to Vanderbilt University, Music Row and downtown Nashville and a style that balances comfort and sophistication.

"We understand and like the long-term prospects for Nashville and West End a lot," said Jon Cummins, chief operating officer at Hutton developer Amerimar Enterprises.

The recession has clearly had an impact on the market. Occupancy dropped to 63.1 percent in October from 71.8 percent a year ago, according to Smith Travel Research, a Hendersonville-based lodging research firm.

But the average daily room rate here actually increased 3.5 percent over that same time frame, to $100.06 a night from $96.67. Only Houston, which has been dealing with an influx of lodgers since Hurricane Ike hit nearby Galveston, experienced a bigger jump in average rates.

Construction cheaper

Those fundamentals are the main reason hotel developers say they're reasonably confident their projects will succeed, despite the poor economy. It's also the basis for a Clarksville group's plan to build a pair of hotels at the corner of West End and 18th avenues.

But there are limits to the optimism. Much of the construction under way now was financed before the recession hit. Other projects, including plans to build a Westin hotel on Lower Broadway and an InterContinental at the corner of West End and 16th avenues, have been suspended indefinitely.

"It's a good time from a construction standpoint because the contractors are hungrier," said Michael Coolidge, senior vice president of development for Westin developer Sage Hospitality.

"If somebody is fully capitalized today … it is a good time to build."

For those who press ahead, the hope is that bargains from construction now will carry them until the rest of the economy turns around.

"This may be the best time to be building stuff," said Baker, "because by the time this is finished, we may be out of this."

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