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Convention Center Hotel Poses Huge Risk for Dallas Print E-mail
by Sam Merten    Mon, Sep 3, 2007, 03:00 pm

Adding an adjoining hotel to the Dallas Convention Center is an idea on its third mayor with no progress made under the Ron Kirk and Laura Miller administrations. On Aug. 1, the City Council was briefed once again and sold on the idea that Dallas needs to add a hotel to be competitive. They were also told public funding will be necessary to make this happen, as has been the case in most other cities.

I wrote a column in early August talking about some ways I thought Mayor Leppert was struggling early. His support of a publicly funded convention center hotel was one of my criticisms. Comments posted on the story and other comments I heard took issue with my assessment that the hotel business should be left to the private sector. Then it occurred to me that the only way for everyone to be able to make an educated decision about this is to bring as much information to the table as possible.

I figured there had to a convention center expert out there somewhere. It turns out the leading authority on convention center research is right here in Texas. Dr. Heywood Sanders is a professor in the department of public administration at the University of Texas - San Antonio. When Ohio Congressman Dennis Kucinich, chair of the Domestic Policy Subcommittee, held a series of hearings on the state of American cities, Dr. Sanders was chosen to give testimony regarding his knowledge of convention centers.

One thing became clear after talking with Dr. Sanders. The number of convention center expansions including attached hotels has skyrocketed. Everyone is doing it. In fact, the amount of available convention center space has more than doubled over the past 20 years.

“You have a situation where lots and lots of cities around the country have decided that this is a market environment that they want to get into, and they want to secure their own piece of the convention and trade show market and the promise of thousands of out-of-town visitors spending millions of dollars in their community,” Dr. Sanders said. “There are lots and lots of cities offering a great deal of space. Essentially, each one of which argues that a bigger convention center will bring them lots more attendees, lots more convention business and lots more economic impact.”

The idea that “everyone else has one” is why Phillip Jones, president and CEO of the Dallas Convention & Visitors Bureau, and other proponents of adding a hotel to the convention center say Dallas needs one to be competitive. Jones told me he knows of a handful of groups that were lost to Houston because they have an attached hotel and said Dallas is passing on $2.4 billion in business that can’t be accommodated.

The problem with Jones’ logic is just because everyone else has one doesn’t make it a sound investment, especially given the problems in the convention center business. In a 2005 story in Forbes, Victoria Murphy (now Barret) wrote the biggest 200 shows measured by Tradeshow Week are using the same amount of space they did in 1992, despite cities' annual capital spending on centers doubling to $2.4 billion from 1995-2004.

“The business is a mess, plagued by a taxpayer-funded burst of expansion and a continuing dearth of customers,” Barret wrote. “The projects are frequently backed by expensive feasibility studies from consultants that rarely give a thumbs-down.”

Dr. Sanders said most convention centers operate at a loss and expansions never meet projections. He also said the private development expected with convention upgrades doesn’t typically happen.

Let’s take a look at Chicago’s McCormick Place, which Dr. Sanders says is comparable to Dallas and Jones agrees is a competitor to Dallas.

Chicago has spent more than $1.5 billion of public money on McCormick Place in the last 25 years, including an 800-room hotel opened in 1998. The convention center expanded to 1.9 million square feet in 1986, 2.2 million in 1996 and just completed another expansion to 2.7 million square feet. For reference, Dallas has a little more than one million square feet.

Like Dallas, Chicago’s reasoning for adding the hotel was pretty simple. They wanted to stay competitive and increase business at the convention center. However, a look at McCormick’s numbers show an investment gone bad.

At the end of 1998, the year the hotel opened, convention center attendance for Tradeshow 200 shows actually went down from the previous two years. It went down again the next year, up a little in 2000, and then went down again in 2001. Of course, Sept. 11 made things rough on everyone that year, but McCormick hasn’t rebounded. It hasn’t come close to reaching the more than one million attendees of 1996 and 1997. Here is a graph I cooked up in Excel to show McCormick’s struggles:

mccormick_1.jpg

McCormick also has seen declines in net square footage at Tradeshow 200 shows.     

mccormick_2.jpg

Perhaps most amazing about McCormick is the perception Phillip Jones has of its performance. When I asked him about it, he said he wasn’t aware that it’s doing poorly. Jones added that he was recently in Chicago at a meeting and the convention center and hotel were full.

“In our industry, it’s pretty well known that McCormick Place and that Hyatt do very well,” Jones said. “I think Chicago is a success story.”

A success story? Geez, I’d hate to hear his idea of what it means to struggle or fail.

Dr. Sanders wouldn’t label Chicago a failure, saying he’s not in the business of saying if something is or isn’t successful. He said he’s in the business of talking about performance and the numbers. Dr. Sanders added that when the huge convention center is filled with people, it’s easy for people to get the impression that McCormick is successful. However, shouldn’t Jones be looking at the numbers before labeling something a success?

Stuff is remarkably murky in this business, but it’s clear Chicago has not gotten anywhere close to where they anticipated with a series of expansions and the addition of a hotel,” Dr. Sanders said.

Murky indeed. As the Forbes story points out, the most-used data in the industry comes from Tradeshow Week, which is owned by Reed Elsevier, a British company that also produces 430 trade shows.

“Its primary measure of the industry's health is its annual list of the 200 best-attended shows, making for a convenient survivor bias, and based solely on data from show managers who have an interest in masking serious declines,” Barret wrote.

It took St. Louis 10 years to finally partner with a developer to build an attached hotel, which is the 1,081-room St. Louis Renaissance Hotel opened in 2003. The principle funding for the $265 million hotel was public money.

A consultant study said hotel business would go from 414,000 room nights to 800,000 when the hotel opened. However, hotel business has shown little change and the hotel has failed to make enough operating profit to pay its annual debt.

Not only is St. Louis’ attached hotel struggling, but the entire downtown hotel market is feeling the impact of the excess hotel supply. Dr. Sanders recently benefited from this when he stayed in St. Louis in June.

He told me he booked a room for a Monday and Tuesday night using Priceline.com at the St. Louis Hyatt Regency at Union Station, a four-star hotel, for $64 per night. Then when his stay was extended, just for kicks he put in another request. Sure enough, he stayed at the attached convention center hotel on a Wednesday night for a mere $56.

“It’s clear nobody [in Dallas] is rushing to build a big hotel next to the convention center downtown and that should say something. But I know what it says because you know I spent $56 for a four-star hotel room in downtown St. Louis and I’ve done the same in other cities where the same thing has happened,” Dr. Sanders said. “The hotel simply isn’t some kind of magic bullet to make your convention center successful.”

In 2004, Woodbine Development Corp. was selected for exclusive negotiating rights to be the private developer to partner with the City of Dallas for an attached hotel project, yet the deal expired. I asked Phillip Jones what happened.

“For whatever reason, the City of Dallas and Woodbine could never come to terms on the finances of the deal, so the term expired without any action,” Jones said.

So if this attached hotel was such a great idea for Dallas, then why would a developer botch the opportunity to get in on such a sweet deal?

The answer may be in the way other hotels get built. Dr. Sanders said what happens is the CVB and city officials insist a hotel is needed to make the convention center work. Then the city tries to get a private developer and those private developments even with public subsidy fail. Finally, more public money is put in to make the deal work.

“What has happened in cities is the private sector looks at the potential rewards and risks of such hotels and often backs off,” Dr. Sanders said.

Hmm…That sounds a lot like the road Dallas is headed down. Right now, Jones is saying that the taxpayers’ contribution in Dallas would be in the $45-80 million range.

“That’s what I’m hearing,” Jones said. “That’s a fairly accurate range.”

However, the contribution is not known and more importantly, the city will likely be on the hook if the hotel struggles. As is common in most cities, the risk is assumed by the city so if the hotel loses $10 million, guess who has to pay for it? Taxpayers will.

The Hilton Americas, a 1,200-room hotel attached to the George R. Brown Convention Center in Houston, opened in December 2003. The Austin Hilton, an 800-room hotel opened a month later. San Antonio has a 1,000-room hotel opening in spring of 2008 and Fort Worth has a 606-room hotel scheduled to open in late 2008. Demand would have to increase substantially to accommodate these expansions along with one in Dallas, but there is no evidence to support such an increase.

When I asked Phillip Jones about this, he simply touted Dallas as the number one convention, meetings and leisure destination in the state and said Dallas operates at a higher level than other cities in Texas. Jones assured me Dallas would see a significant increase in bookings with the addition of an attached hotel.

Houston’s hotel was added in an effort to be ready for the Super Bowl in 2004 and with the Super Bowl coming to Arlington in 2011, a similar push will be made by Dallas. While the hotel has performed OK in Houston, it hasn’t met expectations regarding increased convention center business.

Jones wasn’t so sure about the convention center business, but did say the surrounding hotels in Houston are struggling. I took a look at the 2006 audit of the Houston Convention Center authorized by the city controller. The 89-page report was hardly a glowing review of the center’s ability to meet projections.

What Jones, Mayor Leppert and others selling Dallas taxpayers the convention center hotel are banking on is the pressure to compete not only in Texas, but in the nation among other convention centers with attached hotels and more meeting space, which Dallas would receive as part of the hotel.

However, what they’re not saying is the majority of convention centers continue to lose money and all of the attached publicly-owned hotels are not coming close to meeting the lofty expectations of increased business for the struggling centers.

The president and CEO of Dallas’ CVB thinks McCormick Place is a success story, but the numbers don’t support it. Chicago has implemented a citywide hotel tax, a countywide car rental tax, a tax on downtown restaurant meals and a tax on shuttle buses and vans at O’Hare and Midway airports to support its convention center -- taxes that clearly go beyond visitors. St. Louis’ new hotel is struggling, but Jones claims St. Louis is a “second-tier city.”

The Dallas Morning News has written editorials over the years claiming Dallas needs a convention center hotel, yet Dr. Sanders said I’m the first journalist from Dallas to contact him.

Why?

It’s clear that much like the Trinity toll road referendum, rather than get educated on the issue, the paper takes a stance based on politics or its own interests.

To allow Phillip Jones, the DCVB and the DMN to be the only providers of information on an issue of such public importance would be a major disservice to Dallas taxpayers. This story may or may not change your view of adding a hotel to the convention center, but hopefully it illustrates the incredible risk.

Dallas is a city with a high downtown office vacancy rate, a low hotel occupancy rate and a downtown that isn’t thriving with shoppers. Chicago has a convention center with more than 2 ½ times the space of Dallas, yet is struggling. Even some of the most successful cities -- Las Vegas and Orlando -- need to continue to put money into their convention centers to see a marginal increase in attendance. More space and hotels are popping up all over Texas and all over the country, yet there is no evidence to show a surge in convention center business to accommodate the growth.

If Dallas’ attached hotel is a success, it will have to go against all statistical evidence. This is a risky investment and potential losses will likely fall at the feet of taxpayers. Additionally, once the hotel is built, another taxpayer-funded expansion is likely next.

At some point, you have to know when to cut your losses.

Phillip Jones seems like a great guy, but he certainly doesn’t have an unbiased view of the business. If Mayor Leppert and the council really want to be educated on this issue before moving forward, I urge them to contact an independent party to present them with all the facts so that Dallas can avoid becoming like everyone else -- stuck with a publicly-funded hotel that isn’t meeting expectations.

Additional reading on this topic:

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Comments (9)add comment
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written by Judd D. Bradbury , September 03, 2007

Sam,

I read your article and I was hoping it would provide some thoughtful analysis. Where is the data? The discussion you present is anecdotal. The data you present is also irrelevant to the discussion. It is not necessary for the square footage of the top 200 shows to grow. It is necessary for Dallas to book shows. Do you know how many of those 200 national shows that Dallas has booked for next year? None.

Do you know what the economic impact of one of those shows is? 300 million dollars in sales revenue. Do you know what the City of Dallas will make from each one of those shows? 3 million in hard tax dollars for each one booked.

Dallas is a tier one city, The ninth largest in the nation. We benefit from a warm climate almost all of the year. These shows intentionally rotate for variety. Dallas will get its share of these bookings.

Based on a 50 million dollar investment, you have to book 16 of these shows before the hotel pays for iteself. Using a five year payback model we have to book 3-4 shows each year. Has Chicago booked 4 shows this year.(I know the answer)

Did you call Freeman, Reed, or GES and ask them how many shows they would guide to Dallas if they built a center? Obviously not.

Your idea is what? Give up? Surrrender? Turn the convention center into a skateboard park? Positions like this did not build Dallas into the ninth largest city in the nation. If we were a second tier city this would be a different discussion.

I would love to debate you on this topic next week but unfortunately I will be on a plane bound for McCormick Place in Chicago. They had vision, so next week they get the 3 million reward.



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written by Sam Merten , September 03, 2007

Judd:

There is a faction of people married to the idea that Dallas MUST get this hotel no matter what and you appear to be one of those people. You are certainly entitled to your opinion.

However, I take issue with your dismissal that data I’ve provided is irrelevant. How can you say a decline in convention center attendance for McCormick Place is irrelevant? Regarding the falling square footage numbers, this represents the amount of square footage booked by McCormick for Tradeshow 200 shows. This is relevant because if they are booking less square footage, they aren’t doing as well.

Maybe this will be a relevant number for you. In 2006, McCormick Place booked 18 Tradeshow 200 shows compared to 30 in 1993. What does that tell you? In fact, since the hotel opened in 1998, McCormick has topped the 24 shows booked in ’95, ’96 and ’97 just once in 2003 (25).

I’m quite aware that Dallas is the ninth-largest city in the country. I don’t think Dallas needs a hotel attached to the convention center to maintain or surpass that rank.

I’m also aware that Dallas will get some additional bookings as a result, but the question I’m raising is if it justifies the cost that will be paid by taxpayers.

Judd, if this was such a no-brainer, a developer would have already jumped at the chance to do this deal. NO ONE HAS. This speaks volumes about the risk involved.

Taxpayers deserve to know the risk along with all the info you and Phillip Jones use to sell this.

Enjoy your time at McCormick. I’m sure Chicago taxpayers are happy to pay an arm and a leg to have you there.



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written by Sharon Boyd , September 04, 2007

Sam,

Dallas needs a lot more than a convention center hotel to make the Center viable again. We need some action.

We have a huge car rental and hotel/motel tax (thanks to Ron Kirk) that is as high or higher than other convention cities that have fun amenities to add to the convention trip.

Dallas has the Zoo, which we don't market adequately (but the new Director is on that now). What else is there for a conventioneer to do? Shop? Little of that near the Convention Center.

We need to turn Reunion into a casino and offer them some fun.

Another problem -- the center is too big! No more expansions.

Get rid of the arena sales tax and get the conventioneers some fun other than topless clubs, and we will start to see increased bookings with or without an attached hotel.

FW was smart to do a hotel because they have a smaller facility in a Downtown where you can have some fun w/o being accosted by street bums.

This whole argument is comporable to the Trinity Project debate. If you challenge the big boys' plans, you lack vision and/or you're an aginner. Their world is going to be rocked in November when Dallas voters send them a message of another vision -- common sense.



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written by Judd D. Bradbury , September 04, 2007

Sam,

There is plenty of objectivity and I shudder at having to get this done with a TIF. The strategic reality is to get the CCH done or close up shop. The reason that Dallas does not have a convention center hotel is political not competitive. Yes there is plenty of risk and yes you have to hold your nose on the TIF. We are at a crossroads of courage. Las Vegas, Chicago, and, Orlando have positioned themselves as convention super centers and they will be getting their share. In 10 years these three cities may be the elite 3 cities for conventions.

Yes there is a very competitive market for convention space. In fact if Dallas built a CCH other cities will likely lose a few shows. This would strengthen your narrow argument. The problem with this argument is in not illustrating the whole picture. As Dallas, do we want to be in the convention business? If yes, build it. If no, start making plans to scrap the convention center.

A CCH is the minimum required to compete in this business. Dallas is woefully behind in this area. The proper analysis here is much like any business determining strategy. Do I want to be in this business or not.

Fortunately, Dallas has a number of built in strategic advantages like great airports, low labor rates, and a mild climate. There are also a number of very large conventions that are corporate driven that are not tracked in the Top 200.

The City of Dallas has two main revenue sources; sales tax revenue and property tax revenue. My preference is for more of the former and less of the latter.

For the record, I have never met Phillip Jones but I do know his credentials. I am not selling anything.



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written by randye , September 04, 2007

Ms Boyd,

I think our masters' plan if for the casino(s) and upscale shopping to be along the river with a revamped and renamed Industrial as the grand entraceway.



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written by Just a thought , September 04, 2007

There is plenty of unoccupied major hotel rooms in the vicinity of Dallas! for which the convention goers can reside. What Dallas needs is a major attraction, besides the fizzled out west end and other non major attractions in the downtown area. Vegas is know for Casinos,Miami/Beaches,Sanfrancisco/Goldengate/ and Dallas known for ......... let me know. In my opinion Dallas should use the money for something that is going to attract major conventions and when they figure it out,then be in the Hotel business


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written by Lakewooder , September 04, 2007

Connect the Convention Center, Reunion Arena and the Hyatt Regency with walkways - then spend the millions on Fair Park and start booking some conventions there. Now that is one facility that no other competitor in the nation can match!


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written by Wylie H. , September 05, 2007

Dallas already has a fantastic, privately funded convention center in the form of the Gaylord Hotel. Unfortunately for us, it's located in Grapevine, along with our primary airport.

I have a hard time understanding why anyone wanting to hold a convention in Dallas would actually choose to hold it in Downtown Dallas when they have the option of using the far more convenient, new and safer location of Grapevine.

As an aside, the Dallas Morning News is reporting that the Gaylord is planning a $315 million expansion which will add 500 more rooms and an additional 200,000 square feet of convention space.



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written by Judd D. Bradbury , September 06, 2007

Wylie is correct the Gaylord is pulling the convention business. Dallas is getting left out of the deal. Funny thing those market dynamics.



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