It’s a busy time for hospitality-industry development in Atlanta.
From the city’s downtown business district, to the law firm Center of the Universe in Midtown, to glitzy Buckhead, construction cranes seem to be bumping into each other all over town as they race to complete hotel projects.
Some is about making the old look new. The downtown Marriott Marquis [see picture, left], which opened in 1985, is getting a $138 million facelift. The Sheraton Colony Square’s transformation to the W Atlanta-Midtown was completed in March.
Others are hotel-condominium combinations, like Rosewood’s Mansion on Peachtree, and Twelve Hotel & Residences Centennial Park.
A storied name in luxury hotels, St. Regis, is building its first Atlanta outpost across the street from the Buckhead Whole Foods. Starwood can’t seem to place enough of its W brand in Atlanta—a Buckhead location will open in October, and another hotel overlooking the Downtown Connector from Ivan Allen Jr. Boulevard is slated for December.
The pipeline doesn’t seem to have been exhausted yet, either. The high-end hoteliers reported to be eyeballing Atlanta, many of whom are targeting Midtown, include Loews, Mandarin Oriental Hotel Group, Palomar and Ritz-Carlton. The Streets of Buckhead development may contain a Baccarat Hotels property. InterContinental Hotels Group, which includes the Crowne Plaza and Hotel Indigo brands, wants to open 20 new properties in Atlanta in three years. 
We spoke with G. Brian Butler, a hospitality and real estate development partner at Morris, Manning & Martin, about why Atlanta is the queen bee of the hotel industry. Here is an edited transcript of our discussion.
What’s driving the boom times in Atlanta hotel development?
What’s driving this is the industry’s recovery after the 2001 terrorist attacks. The market suffered for a couple of years, and people weren’t traveling, but it’s been coming back with an absolute bang. Demand had started to outstrip supply, so there are a lot of projects here and nationwide. Construction starts and rooms-in-the-pipeline numbers are at all-time highs.
Is the current economic environment more conducive to renovating existing hotels or building new hotels?
It had been more towards renovating. The great run-up in construction costs has really made it hard to build new projects. It seems to me that they may be turning around a bit, and there is more new construction going on. But building new products from the ground up seems to be cost-prohibitive, unless it’s a joint condominium-hotel project.
Where do you see the development going in the next 6 months to a year?
What you’re seeing mostly is a focus on upscale projects in the city. But I’m also starting to see that, with the economic slowdown that’s here, or that’s coming, some of the focus is shifting back to the value [hotel] segment, as families and businesses cut back on spending.
How are hotel companies financing this activity?
However they can [laughs]. That’s obviously the biggest issue, with the credit crunch. It’s much more difficult, over the last 6 to 8 months to a year to get financing. The commercial mortgage-backed securities market has basically dried up, so lenders are being much tougher on underwriting and the fundamentals. Whereas you once could get 80 percent or 90 percent financing on a commercial mortgage-backed securities-type loan on good terms a year-and-a-half ago, that’s not there any more. The only deals that seem to get done now are those with strong fundamentals, with low loan-to-value ratios. A lot of what you’re seeing today is 65-percent financing, versus 75-percent or 80-percent financing as recently as a year-and-a-half ago. Or a deal can get done if you’ve got a longstanding relationship with a lender, or if you’ve got the funding to do it yourself. There are still hotel-financing deals out there for strong players who can bring the money to the table, or have access to financing.
Can you describe the terms of these financing arrangements?
Rates obviously have been more difficult lately as well. In terms of covenants, I don’t know that they’re getting terribly tighter. If you’re talking about 65-percent versus 75-percent loan-to-value rations, covenants ought to be a lot easier to hit. But spreads on variable-rate financing have gone way up in the past year, although they’ve come back some lately with the Fed easing rates.
Is there such a thing as a city having too many hotel rooms?
There is certainly such a thing. The general industry feel is that while there are a ton of rooms in the pipeline, it’s not going to be as overdone as maybe it was in past downturns. In 2001 and in the early 1990s, supply was getting too far ahead of demand. Some markets are still going absolutely crazy with the number of rooms in the pipeline. Although that’s not the case with Atlanta so much, it is the case in Las Vegas, Phoenix and San Antonio. Those three cities have got rooms-in-the-pipeline that equal 30 percent of their current supply. Atlanta is still strong. InterContinental Hotels announced last week they have 19 projects in their pipeline in Atlanta. You’re still seeing strong growth in the region. And Midtown also seems under-served by luxury, high-end hotels.
I read a recent Wall Street Journal article about how many Sheraton owners and operators of Sheraton properties are trying to persuade Sheraton’s parent company Starwood Hotels & Resorts Worldwide to convert their Sheratons to the W brand or to Westin, but Starwood is trying to hold the line. How was Noble Investment Group, a Morris Manning client, successful in making its case to convert the Sheraton Colony Square to a W?
I wasn’t involved in initial discussion about that [Daily Report story, Aug. 24, 2006]. But where that asset is located, right in the heart of Midtown, that location cried out for an upper-scale product like W. It was a hotel that definitely needed something major to happen to it. For it to be that kind of renovation, it made sense to take it up to a W. That corner, 14th Street and Peachtree, you want a landmark, high-profile hotel.