Tuesday, August 16, 2005

City owned hotels. Views from Baltimore and SC

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The Baltimore Sun

August 14, 2005 Sunday

Mixed reviews on city-owned hotels;

With the City Council poised to approve a convention center hotel, other cities offer a comparison.
Jill Rosen, SUN STAFF

One morning last spring, not long before Baltimore would find itself neck-deep in divisive arguments about building a public hotel, Myrtle Beach, S.C., readers unfolding their hometown newspaper probably rubbed their eyes, thinking they'd picked up a flea market circular.

"Need some slightly used bed comforters?" a front-page story began. Have any use for a couple of hundred pillows? Tissue box covers? A lifetime supply of travel-sized soap and shampoo?

"If so, the Myrtle Beach Hotel Board Corp. has a deal for you."

Just two years after a buoyant ribbon cutting, after politicians effused over how this sleek, city-owned hotel would turn South Carolina's beach getaway into a desirable corporate destination, Myrtle Beach was hawking the soap.

Baltimore's City Council is poised to approve tomorrow a city-owned convention center hotel. Though it would be Baltimore's costliest public project, Mayor Martin O'Malley and the hotel's other fans say paying for it with $305 million in revenue bonds is not only is a bargain, but it's also all but risk-free.

But as cities across the country rush to build hotels and claim convention riches, some find horror stories and others, a mixed verdict. At best are cities like Houston. Though the opening of a new hotel hurt ones already in existence, a city official there says the extra rooms have helped to double their conventions this year.

Undaunted, hotel proponents here want their Hilton. Unleash the floodgates of meetings business, they say, watch the prosperity spill over into the entire downtown market, count the extra dollars, the sheer profit, that will roll into the city's coffers.

Myrtle Beach begs to differ.

So do St. Louis, Omaha, Neb., and Overland Park, Kan. - all cities that used public money to build hotels. Failing hotels.

Other cities playing innkeeper, places like Houston and Austin, Texas, have sunnier outlooks. While awaiting their promised convention gold rushes, they might be short of projections on room rates and occupancy goals - but they're making ends meet.

That, industry analysts say, is as good as it gets.

The convention market that Baltimore wants to further invest in is anything but a sure thing, they say. It's fraught with imbalance as more and more cities build and expand facilities and more and more of them go for headquarters hotels on the side - all to capture a meetings business that's stuttering, trying to shake off the damage from the post-Sept. 11 travel industry chill.

According to Tradeshow Week, the convention industry is slowly recovering from 2001, but not to the levels of the 1990s. In 2004, events nationwide rose 2.3 percent. Attendance, however, slipped slightly from about 51 million people to 50 million.

"The convention market right now has become quite saturated with supply, so a lot of cities are finding they have to give away the space to attract visitors," says Anne Van Praagh, an analyst for Moody's Investors Service.

Convention centers are "money losers," she says. "And now we're seeing that many of the hotels built to accommodate [them] are struggling to survive."

Having reservations

In Baltimore, skeptical City Council members spent the summer firing tense questions at the development agency and its hotel consultants. Do we need another hotel? Why does it have to be government-owned? And exactly how much risk does the city face here?

A few weeks ago, trying to ease people's minds, Clarence Bishop, the mayor's chief of staff, took the microphone to say, calmly yet forcefully, that the hotel is another step, albeit a critical one, in Baltimore's upwardly mobile climb.

To reach its full potential as a destination, the city must have a convention hotel, he said. Using public money is the only way to get it. And, he added, the city won't remove a penny from other programs to make it happen.

"The administration feels - and feels strongly - the iron is hot," he said. "The need is clear; the path is clear, and it's time to act."

Though hotel doubts sharply divided the council for months, the project now appears on track for approval.

It seems inevitable that the city will build its Hilton next to the downtown convention center, that people might check into one of the 752 rooms or dance in the ballroom by 2008. Other cities struggling with their hotels don't faze Baltimore officials. Overland Park and Myrtle Beach? Too small, too suburban, they say. St. Louis? Its downtown revitalization isn't as far along.

Cities of all sizes, in all corners of the country, are asking the same questions as they teeter-totter on the edge of hotel ownership.

Pittsburgh. Dallas. Hartford, Conn. Erie, Pa. Providence, R.I. St. Paul, Minn.

Portland, Ore., too. The city badly wants a hotel - but not badly enough to build it alone.

City officials are shopping for a private developer who won't demand an arm and a leg in subsidies. But meanwhile, they're hearing Myrtle Beach-type nightmares and wondering what's worse: not acting and allowing their convention center to descend into the red, or going for a hotel that may or may not fix the problem.

The way the mayor's policy adviser for economic development, Rochelle Lessner, sees it : You're doomed if you do, doomed if you don't.

"There's so much uncertainty," she says.

Heywood Sanders, a professor in Texas with a doctorate from Harvard, will talk anyone's ear off about that uncertainty and the "folly" of cities building hotels. He has published report after report on the "heartbreak" of watching money that could revitalize downtown areas or bolster visitors bureaus instead bailing out Hyatts or Sheratons.

The consultants who endorse convention center hotel projects dismiss Sanders as "Dr. No," the crusader who has never met a public hotel project he liked.

"Look," says Sanders, a public administration professor at the University of Texas at San Antonio. "I don't relish the role of Official Cold Water Thrower. It's just that I have a long list of cities where this doesn't work. Why is it going to be different [in Baltimore]?"

But Charles Johnson, president of a consulting firm that has advised cities to invest in convention center hotels, says Sanders is jumping to cataclysmic conclusions. Yes, some hotels are choking, he admits. But that's no reason to write off an industry - one so potentially rewarding for cities - as it's showing signs of a rebound.

"It is a misnomer to say the convention industry is on a downward trend," he says. "The last few years has taken a reduction in demand ... but it's very clear the market is seeing a pattern of growth."

Aaron Freedman, another Moody's analyst, could not care less about the political rhetoric of what cities need or don't need. Only cash - and the likelihood that a hotel project will get it into bondholders' hands. That said, convention center hotel plans leave him cold.

"These projects are fairly high-risk ventures from our perspective," he says. And "we really have a very narrow perspective - whether the bondholders are going to get paid on time and in full."

But the emotional world of politics eventually crashes headfirst into Freedman's cash-centric universe. To build a hotel, a city needs a favorable bond rating, keeping projects costs lower. Unfortunately, the better Freedman feels about a deal, the worse taxpayers should.

He's only happy when a city has pledged a pile of money to back its bonds - the money the city is obligated to pay if the hotel doesn't perform.

In Baltimore, that has meant a promise of citywide hotel occupancy taxes.

"Consultants say these projects will stand on their own two feet without any municipal support," Freedman says. "Obviously that's not the view we take."

Overland Park

On its Web site, the Overland Park convention bureau boasts that the grassy Kansas City suburb is the second-smartest city in the country, thanks to its heavily degreed population.

The four sites the city shows off on its "attractions" page include an arboretum, a dinner theater, a petting zoo and a collection of Dick Clark's personal memorabilia.

In 2002 Overland Park swung open the doors on a $54 million Sheraton to accompany a brand-new convention center.

Even planners didn't expect the 400-room hotel to profit in 2003 - they had a reserve fund ready. No one, however, anticipated similarly sour circumstances last year, when the city was forced to write a check for about $1 million to cover the hotel's debt. And certainly not this year, when the bailout cost about $1.6 million.

City Manager John Nachbar has already given up on things improving next year - he's putting the end of the rainbow another year out.

"Hopefully, in 2007, it shouldn't require any more from the city," Nachbar says.

As Overland Park battled plummeting room rates last year, Omaha unveiled a 450-room Hilton, which, like its neighbor to the south, rose in tandem with a convention center. Also like its neighbor's, Omaha's project is hurting.

Next year, the city will likely have to take $2 million from its $3 million reserve fund.

"We have not attracted the number of conventions that were in the original projections," says Carol Ebdon, Omaha's finance director and president of the city's hotel corporation. "Take any market studies with a grain of salt."

Public money largely paid for a $265 million headquarters hotel in St. Louis that opened in 2003. The hotel was supposed to double the city's group meeting business.

Officials predicted the new hotel would enable the city to host 56 conventions in 2003. They got 25. Last year, the hotel was projected to bring in more than $13 million. According to Sanders, it lost more than $400,000.

Though he said he's disappointed in the hotel's performance, St. Louis Mayor Francis G. Slay says it has substantially beautified downtown.

Last year Moody's downgraded the hotel's bond rating.

Gaps in performance

Recently Sanders harrumphed at an entry on Slay's blog, one on which the mayor details a trip to Washington with convention recruiters to drum up business. St. Louis' angst makes the professor's point: Smell the desperation.

In his much-quoted report last winter about the bloated state of the convention industry for the Brookings Institution, Sanders compared the actual performance of convention centers and their counterpart hotels with how consultants predicted they would do.

In nearly every case, he found gaps. Sanders argues that the convention center expansion craze sweeping the nation, combined with a shriveling meetings industry, defies the conclusion that pouring money into the conventions game is an effective economic development tool.

Bruce Walker, the founder of the hotel consultant firm Source Strategies, agrees, saying that telling hard-luck cities that if they spend public money on convention center hotels, meeting planners will knock down their doors is tantamount to fraud.

For healthy tourist towns like San Antonio, where he's based, Philadelphia and maybe even Baltimore, a new hotel - even without the promised convention business - "probably won't hurt much." Pre-existing hotels might take a small hit as tourists check out the new hotel in town.

Or, you could wind up with a situation like Houston, where, since the 1,200-room city-owned Hilton opened in 2003, other downtown hotels reported significant drops in occupancy, forcing three into bankruptcy, according to Walker.

It was "a monstrous blow," Walker says of the Hilton's impact on Houston's downtown hotel market.

Peter McStravick, project coordinator for the agency that manages Houston's Hilton, says it's not the end of the world, just an uncomfortable "ramp-up" period. "That," he says, "is the nature of the beast. ... It's real estate, and it's also the hotel business. You have to have the reserve and the staying power."

McStravick adds that after a mayoral task declared that to make the Hilton successful Houston would have to double its citywide conventions, the city was able to do it this year.

Hotel industry analyst John Keeling puts it like this: "Short-term pain for some long-term gain. ... We're headed in right direction, if this continues."

Forecast unknown

Without crystal balls, Sanders' dark forecast is left to compete with the industry's all-systems go.

The building boom, fueled by unbridled optimism, seemingly won't be stopped by a few negative think-tank reports or the strife of a Myrtle Beach, a St. Louis or an Overland Park.

Sanders guesses it's people's innate desire to believe that their chosen hometown is worthwhile.

"It's their town; it's a wonderful town, and all they need is this one extra thing to make their convention center competitive," he says. "They believe it's important to believe. ... But everyone else believed too."

Donald F. Norris, a public policy professor at University of Maryland, Baltimore County, compares government's convention fever with the public sector's apparent willingness to break the bank to build stadiums when sports teams threaten to leave.

"They think they need that sports team to have a world-class city," he says, adding that the same goes for a hotel. "The more likely they are to attract conventions and tourists. The problem is, they don't pay attention to the data. They convince themselves the data are wrong."

Cities, and Baltimore is no exception, have "edifice complexes," Norris says. "We can throw money at buildings a lot easier than we can fix social problems."

Myrtle Beach's nearly 400-room hotel was supposed to pay for itself and bring the city millions extra, but the city has had to dip heavily into its hospitality tax funds to cover the Radisson's debt. Disgusted city leaders severed the deal with the chain and threw the hotel supply tag sale to help pay for a brand change.

Myrtle Beach City Councilman Randal Wallace, whose new mantra is "Government ought to be fire, police, water and sewer," remembers the lonely voices of dissent who doubted the hotel consultants' dreamy promises, the scorned minority who worried about the city's stepping awkwardly into the realm of private enterprise.

"I think," he says, with a dry laugh, "that they were probably about right on target."

Fingers remain crossed there that convention-goers will eventually discover their pretty hotel, with its sparking glass entry, polished wood interior and ambient lighting that whispers class.

"Five years from now, we might be saying it has been a benefit to the city," Wallace says. "It just took it a while to go."

Knowing his municipal brother to the north, Baltimore, will likely follow Myrtle Beach into the hotel business, Wallace can only say: Take heed.

"I would just be hesitant if I were in Baltimore," he says. "It may cost them a lot of money - it's cost us a lot of money."

Sun staff writer Justin Fenton contributed to this article.
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PHOTO(S) / CHART(S) / MAP(S)
1. Baltimore's City Council may approve a city-owned convention center hotel tomorrow. Some cities have not had success with such ventures. 2. The city-owned Renaissance Grand Hotel in St. Louis has not been successful in bringing in convention business and has almost depleted its reserve fund to pay the bond debt. 3. Convention center hotels nationwide. 4. Hilton Americas-Houston 5. Radisson Plaza, Myrtle Beach 6. Sheraton Overland Park, Kansas 7. Renaissance Grand, St. Louis 8. Hotels in other cities
1. ALGERINA PERNA : SUN STAFF 2. ROBERT COHEN : ST. LOUIS POST-DISPATCH 3. DENISE MURRAY : SUN STAFF 4. HOUSTON CHRONICLE 5. MYRTLE BEACH SUN NEWS 6. MISSOURI DEPARTMENT OF NATURAL RESOURCES 7. KANSAS CITY STAR
August 15, 2005

August 16, 2005 8:57 PM

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