Challenges in financing a major hotel are holding up the huge office-hotel project known as Menlo Gateway, developer David Bohannon said in a recent letter to the city of Menlo Park.
He said that "realistically the hotel is still probably a couple of years away from being able to obtain financing."
The letter was written in advance of the Menlo Park Planning Commission meeting on Monday, Dec. 5, when the commission will review the Bohannon Development Company's compliance with the city's development agreement.
In 2010, the City Council and voters approved the 941,000-square-foot project, which would be built on two properties: 100 to 190 Independence Drive and 101 to 155 Constitution Drive.
In the Nov. 14 letter, Mr. Bohannon said that while economic conditions affecting the office and hotel components of the project are improving, "financing the hotel component in particular is likely to be a very challenging prospect in the near term."
He said he is working with Marriott International and Leisure Sports Inc. and that they have "expressed a strong interest in developing a Renaissance Club Sport/Hotel," which would have fitness and spa facilities in addition to hotel rooms.
He said he has met with several large prospects for the office space, but he has advised them "that because the office component cannot proceed without the hotel, and the timing of the hotel component remains problematic, we are not able to proceed with the office at this time."
The Class A office market in the Menlo Park/Palo Alto area has "improved dramatically" in the past year, he said, with the vacancy rate declining from 14.2 percent to 7.8 percent and rents rising 24 percent.
The hotel market is rebounding strongly, too, he said. However, due to increased operating costs, "operating profits will not return to 2008 levels until 2013 or 2014."
"Based on these factors," he said, "industry experts do not anticipate construction of any major new hotel in the Bay Area for the next 24 to 30 months."
Marriott's interest in Menlo Gateway is due to the economic outlook for the Silicon Valley and, in particular, the Facebook move to its new campus at Willow Road and Bayfront Expressway.
Facebook, Mr. Bohannon said, is expected to "generate a significant part of the lodging demand" for the new hotel -- about 14,000 room nights per year, about a quarter of the anticipated demand.