Some recommendations:
Taken from the email to avoid confusion:
"There is one on State street off Lark called the morgan state house
http://www.statehouse.com/default.htm . it's a tiny B&B in a brownstone (393 State street #1-888-427-6063) they'd be close enough to walk I suppose but it would be a 20-25 minute WALK from washington and lark all the way to washington and north pearl, then all the way down North Pearl Street to the palace theatre. But they could always catch the #12 bus at lark and washington and it will take them to north pearl and washington and they can walk down north pearl when they get off. and that would only take about 10 mins. I hear it's a really nice hotel and it's of course where everyone wants to be when they're in albany (lark area)."
And probably not so helpful:
"There was a hotel right by there (short short walking distance) by washington and north pearl, but I forget what it's called. it's a big shiny building across the street from kinkos and stagecoach. that would be the best bet if it was still around since that is reeeeally close, but I think it closed down cause I can't find it online. I know the hotel I told u about was expensive, but they do give 10% discounts to people who show them their arts and entertainment tickets eg. palace theatre tickets. so that's a plus. The cheapest rooms are $135 a night but they are luxury rooms so it's worth it. "
My friend lived in Albany for many years. She is a bit wordy, but helpful
Hope that gives you some more options. Check out lark street and Washington Park which is right off it, it is a really pretty part of town and a beautiful park.