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Airport hotel in limbo

February 2, 2009

Plans for a 250-room hotel connected to the new Indianapolis International Airport terminal are in the deep freeze as the lodging industry contends with vacancies at a 20-year high.

Just when the project might be revived is difficult to say. One thing is certain; the hotel won't be open in 2009 as planned—and 2010 is a long shot.

"Hotel projects right now are having a very difficult time getting any financing, even if they're solid deals," said Rob Hunden, president of Chicago-based hotel consultant Hunden Strategic Partners. "The same project that looked like a winner six months ago, right now might not pass the test."

The airport hotel, which was to include 15,000 square feet of meeting space, will take about 18 months to build. That means there isn't much time to finalize plans for a hotel that could open before 2011.

The project was delayed when Mayor Greg Ballard unseated Bart Peterson and installed a new regime to oversee the Indianapolis Airport Authority early last year. The transition, which included Randall Tobias' taking over as head of the Airport Authority board, derailed a hotel deal with locally based Mansur Real Estate Services. In the meantime, the recession and tight credit markets caused upheaval in the hotel industry.

Last year, airport authority officials said they would take up discussion of the hotel after the first of the year. But that hasn't happened yet, and the imminent departure of Indianapolis International Airport Executive Director John Kish has thrown another wild card into the mix.

Kish, who directed construction of the $1.1 billion midfield terminal, has been hired by the Evansville Redevelopment Commission to oversee construction of an 11,000-seat downtown arena. He is departing his airport post in April.

"Now that we are through the opening of the new terminal and the holiday season, it is something that will be considered," said airport authority spokesman Susan Sullivan of the hotel project. "There's just no timetable."

In 2007, the airport authority approved spending $8.8 million to help fund construction of a hotel connected to the midfield terminal and its attached parking garage. The board had chosen locally based Mansur Real Estate Services from among three developers that submitted project proposals. Mansur proposed building a $50-million-plus, Westin-brand hotel. Mansur and airport officials intended to finish the hotel by this summer.

There are numerous factors that might be making local airport officials hesitant to proceed with the deal, Hunden said.

"Occupancy rates for hotels right now are down 5 [percent] to 10 percent nationwide," Hunden said. Occupancy will get much worse over the next three years, he said, as construction ends on hotel projects that were launched between 2005 and 2007 and those new rooms flood the market. "That will suck the life right out of occupancy."

Several new hotels already are opening near the Indianapolis airport, including a Hampton Inn & Suites and Hilton Garden Inn at the Interstate 70 airport exit. Another 300-room hotel is in the works as part of the Purdue Accelerator Park at Ameriplex Indianapolis, south of I-70 directly across from the terminal.

The nationwide decline in occupancy has caused room rates to fall. The corresponding revenue declines this year are projected to be the steepest in nearly a decade according to Philadelphia-based market research firm PKF Consulting Inc. PKF studies project that 20 percent of hotels nationwide won't be able to generate enough cash this year to meet loan payments.

Long term, Hunden said, there will be a need for a hotel connected to the midfield terminal.

"Historically, demand for those types of hotel rooms is strong," he said. "And it gives more value to your airport and will attract more people to your region."

Mansur CEO Lee Alig agrees. He said Mansur is still interested in the project despite delays.

"We at Mansur and our partners are still interested in proceeding with a hotel, and we look forward to that opportunity when the time is right," Alig said. "We have a whole team still in place—architects, engineers, contractors and all the other consultants."

The $8.8 million the airport authority pledged to the deal is not out of line with commitments government officials have made for other hotel projects. That subsidy would cover about 17 percent of expected construction costs. That's more than the 12-percent city subsidy provided to the $425 million JW Marriott convention hotel complex being built downtown, but less than the 29 percent the $100 million Conrad Indianapolis received.

While most hoteliers these days are biting their nails over occupancy, Hunden is optimistic that by the time the JW Marriott hotel complex at West and Washington streets is operational in 2011, the worst of this current economic storm will be behind us.

"The JW Marriott is already financed, so it shouldn't have any problems there, and should hopefully open into a market that is improving, as opposed to cratering. I think the long-term future for that property is positive."

Despite the influx of hotel rooms locally, Alig thinks an airport hotel with convention space and a full-service restaurant would succeed. He said it would appeal to business travelers, airline employees and those coming from outlying areas such as Fort Wayne or Evansville who might choose to stay overnight at the hotel for an early-morning flight.

"This is a project we remain excited about," Alig said, "and believe strongly in."

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