Hotels closing in

After five years of new student housing, the local market is ripe for a batch of incoming hotels.

by Anne Millerbernd

Developer Kelly Doran marked the beginning of a luxury student housing explosion near the University of Minnesota when he broke ground on Sydney Hall  in 2009.

More than a dozen near-campus complexes have popped up since then. This summer, five years after his first project, Doran put his portfolio of six student apartment buildings up for sale.

In a struggling market, Doran was one of the first  to gamble on luxury apartments, and many others followed suit. But recently, some developers have quietly shifted their focus from housing to the budding business of campus-area hotels.

As work on the currently nameless hotel on Essex Street and Huron Boulevard Southeast continues, two other sites near the University are slated for hotel projects.

Plans for a hotel in Dinkytown are underway, and city leaders saw plans this summer for another proposed five-story hotel in the Prospect Park neighborhood.

While the Twin Cities’ apartment boom largely met the needs of those who wanted more on-campus housing options, many say hotels are the next logical step in commercializing the University area.

Approaching a ‘tipping point’

Across the country, students and young professionals have gravitated toward urban areas, prompting a national trend of apartment buildings near campuses.

A national survey conducted by J Turner Research concluded that students are willing to pay higher rents for apartments that are close to campus and loaded with amenities — exactly what developers around the University are offering.

The University area has evolved from just a handful of housing projects to a surge of construction over the past several years. But recently, the tone has shifted to discussions of whether the market is saturated.

At least five new complexes around the University opened this fall. Though most of the currently operating apartments are near maximum occupancy, some may be struggling to fill up.

Education Realty Trust, a national collegiate housing firm, has noticed more competitors enter the market in the past few years, said Scott Barton, the company’s vice president of acquisitions.

It’s difficult to predict when developers should stop focusing entirely on apartments, said Haila Maze, principal planner for the city of Minneapolis. The best indicators, she said, are leasing and vacancy figures.

“At some point, the market is only going to be able to handle so much,” she said. “I think figuring out that exact tipping point seems to be a mixture of art and science.”

Local developers maintain that their projects have a future near the University.

The Marshall, developed by Education Realty Trust, is currently the area’s largest housing complex, with 326 units that can accomodate a total of 994 people, Barton said.

Right now, he said, it’s just over three-quarters full. Even at that level, the Marshall is still home for more people than many other housing developments can hold.

But developers typically aim for a tighter occupancy rate. In the third quarter of 2013, the average apartment vacancy rate in Minneapolis was slightly less than 2 percent, according to a trend report by Marquette Advisors.

The Marshall offered marked-down rents during the beginning of the school year. That could be managers’ reaction to nearby competition, Maze said.

Property managers who are worried about filling up their buildings might turn to discounted rent or free perks to distinguish themselves, she said.

But Barton said that’s not the case for the Marshall, adding that discounts are common in the housing industry.

“It’s not always an indication that the market is oversaturated,” he said. “Sometimes it’s the cost of doing business.”

Doran, a leading figure in the industry who keeps an eye on competitors, said he thinks the Marshall and Metro Park East, an apartment in the Stadium Village area, show signs of struggling.

The Marshall, he said, appears too big for potential lessees, whereas Metro Park East might be too far from campus.

When Doran first started construction on Sydney Hall, he said, there weren’t many new housing options for students near campus.

Soon after, developers followed suit and pursued the untapped demand for University-area apartments — a demand that Doran said still exists.

“If you take out [those exceptions], all of the buildings are nearly full,” he said. “Maybe there’s not as many buildings that are at 100 percent [capacity] like they used to be last year or the year before, but they’re still 95, 96, 98 percent leased, which is very good.”

Housing to hotels

The housing boom met the demand of a younger generation that wanted to live close to school. Now, as developers work through the hotel planning process, others already on the scene say they’re unconcerned about added competition.

Wherever there is housing, hotels are bound to follow, said Dean Dovolis, the founder and CEO of DJR Architecture, which is involved with plans for two University-area hotels.

That’s because younger people have started to gravitate toward urban areas to live, socialize, work and go to school in one central location.

More people living in an area means more people visiting, and those visitors need a place to stay.

“Housing and hotels sort of go hand in hand,” Dovolis said. “Job creation and housing create a demand for hotels.”

It’s been decades since the last University-area hotel was constructed, and the school has added thousands of students since then.

Parents, as well as visiting professors and researchers, have needed a place to stay overnight during that time, Dovolis said, but development didn’t keep up.

People look for a variety of things when searching for hotels, Doran said, and having only a few to choose from in the area limits their options.

“It’s not always about having a bed at a low price,” he said. “It’s about the environment.”

Dovolis’ Dinkytown plans would place a hotel over the parking lot behind Mesa Pizza and Dinkytown Tattoo.

Dovolis’ firm is also working on a planned 123-room hotel on Essex Street and Huron Boulevard Southeast, meant to serve the nearby Ambulatory Care Center, which opens in 2016.

Around the same time Dovolis began work on the Dinkytown hotel, Kaeding Management Group submitted plans for a hotel in Prospect Park on University Avenue Southeast.

The three hotels in the pipeline are in the same area as four others that are currently open.

Doran, who proposed a Dinkytown hotel last year but didn’t pursue the project, said the demand for hotels has existed for a while, but it’s only now being recognized.

Other large campuses across the country have more hotels near them than the University does. And the incoming crop of local hotels doesn’t worry the existing ones.

Kelly Commerford, director of sales and marketing for the Commons Hotel, doesn’t consider the proposed hotels to be competition because they won’t offer as many perks as the Commons, he said.

Though he’d rather do without the extra hotels, Commerford said, the Commons will do its best to maintain the nearly full capacity at which it usually operates.

And the Days Hotel in Stadium Village welcomes the extra attention new hotel projects will bring to the University area, said general manager Debi Grant-Smith.

The area has become more attractive to potential visitors as the University continues to expand and climb the ranks nationally, along with the opening of the Green Line light rail, she said.

“I just think the more competition we have here, the better we’re going to be in the long run,” she said.