Silicon Valley Business Journal
05/06/16

21-Story Addition Contemplated for Historic Montgomery Hotel in Downtown San Jose
By Nathan Donato-Weinstein

http://www.bizjournals.com/sanjose/news/2016/05/06/21-story-addition-contemplated-for-historic.html

It’s easy to miss the narrow parking lot between San Jose’s historic Montgomery Hotel and the back of the Fairmont annex. But this strip of pavement is where the Montgomery’s owner is considering some ambitious plans: A 21-story tower addition that would contain some 280 guest rooms.

To fit all those rooms into a narrow footprint, owner Khanna Enterprises would construct Silicon Valley’s first cantilevered tower, with the seventh story stretching out over a portion of the 1911-built Montgomery (now known as the Sheraton Four Points — though long-timers will always call it by the former name).

The plans, submitted last month, are preliminary — meaning that they are being being proposed purely for feedback from city staff. A formal proposal could see changes to the design, if it even moves forward.

But the mere existence of even an early concept shows strong interest in hospitality in downtown San Jose, which has seen increasing room rates and decreasing availability. Yet unlike other Silicon Valley submarkets, only one new project has broken ground during this cycle — a 210-room AC Hotel that’s under construction at Highway 87 and Santa Clara Street.

The city’s latest monthly occupancy rate, for March, showed the average daily rate in the city’s seven downtown hotels was $227, up from $207 a year ago. The strength is being driven by business travel and an increase in convention business, thanks to the expansion of San Jose’s McEnery Convention Center.

Representatives from Khanna Enterprises didn’t return phone calls. Neither did TCA Architects, which is working with the company.

Plans for the site at 211 South First St. show a skinny structure rising the first six stories snuggled up close to the Montgomery, with a single row of guest rooms. Beginning on Level 7, the floor plates expand out further, providing enough space for rooms on either side of a corridor and extending, ever so slightly, over a portion of its neighbor. The early look features a glass-dominated curtain wall facing West San Carlos Street, not unlike the San Jose Marriott. The 245-foot-tall building is topped off by a roof-level pool, bar and fitness center.

A street-level view shows about half the footprint on the initial floors, on the side nearest the Montgomery, as a soaring atrium sheathed in clear glass. The intent seems to be to give visual space between the two structures, so as not to cover up the handsome side of the historic building.

Alan X. Reay of Atlas Hospitality said if the project got built, it would likely do very well in the submarket, especially because new hotels tend to get a 20-percent lift in room rates compared to the existing competition. One critical aspect of the project, though, is parking. It’s not clear how the proposal will address parking requirements on-site. If the developer plans to handle it off site, “You’d better lock in a long-term parking agreement,” Reay said. “I could not see that hotel developed unless they have one.”

He estimated construction costs at about $350,000 to $400,000 per key. High construction costs is one reason why the area hasn’t seen new high-rise hotels recently, Reay said. Many lenders are also maxed out on the amount of hotel loans on their books, which is expected to slow development this year even though the economics are still good for new projects.

The design is sure to raise eyebrows given the proximity to the Montgomery, which is on the California Register of Historic Places. The building, built in the Greek Revival style, was the city’s first modern hotel, and was for years considered its finest. It declined beginning in the 1960s and was eventually faced with demolition.

In 2000, the city paid $9 million to move the 4,800-ton building 187 feet south on First Street to make room for expansion of the Fairmont ( see YouTube video here). After another $11 million subsidy from the city to seismically retrofit the structure, it reopened in 2004 as a boutique hotel operated by Joie de Vivre Hotels.

Khanna, based in Santa Ana, bought the hotel in 2008.

Despite the paucity of similar projects in the South Bay, examples in more dense cities aren’t hard to find. But as this 2014 New York Times story points out, they can raise construction costs and introduce engineering challenges.