Field of Schemes

Archives

Older Entries

September 07, 2004

"A Lot of Hooey": Heywood Sanders on Convention Center Economics

Heywood Sanders of the University of Texas-San Antonio is undoubtedly the best-known (and best informed) independent critic of publicly financed convention centers, a multi-billion-dollar business that is starting to rival sports stadiums in its ubiquity and cost to taxpayers. In late July 2004, Neil deMause spoke with Sanders about the convention-center game for fieldofschemes.com; an edited transcript follows.

It seems that from an economic development standpoint, convention centers should be a better deal than other development, because it's all fresh blood, right?

That's what always intrigued me about it. The argument is that, compared to a stadium or arena that would simply be moving around existing dollars, the logic of the convention center is that it's bringing in people from out of town. So it's effectively importing new dollars. Compared to other big economic investments, that should be a big plus.

That's the theory, at least. And to the extent that it does that in practice, it should be a boon to the community. It just doesn't happen.

Have there been a lot of studies of economic impact of convention centers?

There are comparable to the stadium side, which you've seen and talked about in Field of Schemes, and which Public Dollars, Private Stadiums talks about. Almost every center and/or expansion comes with a consultant feasibility study that says so many new people will come, and those people will stay multiple days in local hotels, and will spend hundreds of dollars every one of those days, and will yield ultimately hundreds of thousands in new direct spending multiplied by some inappropriate multiplier, generating massive economic impact numbers. I have an office and a house filled with such studies.

I've tried to look at it in the terms that the impact studies have, and that is: If you build it, do they come, in what volume, for how long? And how has that evolved over time? Because we're looking at a situation that is subject to a whole series of larger cyclical and systemic market changes over time. When [New York's] Javits [Convention Center] was first proposed in the early '80s and ultimately built, the situation changed as the national economy expanded and evolved during the '90s, and today its situation is remarkably different.

Among other things, we've seen a massive increase in the last ten or 15 years in the availability of convention center exhibit space. In the period since Javits opened, there are new centers in Washington, in Boston - which just opened in June - in Philadelphia. There is a new center that will open up in 2005 in downtown Hartford. There is a center that opened after Javits in Providence. The state of New York has Buffalo sitting on a host of studies for a new convention center, Albany doing likewise, with the state legislature having just approved the creation of a convention center authority in Albany. We have folks in Syracuse looking at the development of a new headquarters hotel to serve their convention center, and the possibility of an expansion of their center. We have Pittsburgh just having opened their center about a year and a half ago. And that's just in the region!

This amounts to about a 50% increase in space - and lots more space coming on line. Another half million square feet in Chicago, another half million in New Orleans.

So while the logic of the convention center is that it's bringing people from out of town, you have to flip that logic on its head. Because to some extent the stadium's market is guaranteed: Local as it is, some number of people will go to a game - even to a Jets game. But in a market where dozens and dozens of cities are building new or expanded convention centers, the likelihood of any one city, including New York, substantially gaining market share...

Is there any evidence, either in terms of broad studies or specific anecdotal evidence, of how different centers have done when they expanded?

Sure. They either don't gain business or they lose it.

Let me give a tiny bit of background. The newest fillip of this is the contention by the standard industry consultants that a large headquarters hotel is essential to the convention center business. That is, in fact, part of the argument with the Javits.

In an article Government Finance Review published in June, I looked into how many of those hotels these days are publicly owned. What I call "hotel socialism" is alive and well and spreading, and cities around the country are literally getting into the hotel business in situations where private capital can't or won't take on the risk.

The idea being that a hotel is necessary in order to book the convention space?

That's right. So this article looks at four of these cases, to see how that actually works: Once you have the hotel, what happens, both to the hotel and to the convention center? In perhaps the most intriguing case, the city of St. Louis largely bankrolled, in part using a $98 million federal empowerment zone bond, with some private equity investment, a new 1081-room Marriott Renaissance Hotel. It opened in 2003. It was supposed to do 62% occupancy; it has done under 50%. It has run in the red since it opened. It has only made its payments on that $98 million bond by going into credit reserves. Moody's downgraded the bond in September from the bottom investment grade to a speculative grade. They have subsequently put it on their watch list, because it looks like it's going even further under, and the thing is burning money. [Editor's note: Moody's further downgraded the bonds last month, adding: "Unless the local convention business improves significantly, we expect continued credit deterioration absent third-party financial support of the hotel."]

It was built with the argument that St. Louis had, circa '98 or '99, 33 major convention events a year. The CDB director argued that with the hotel, they'd get 50. A spokesman for the hotel developer argued that they'd get 56. So what did they do last year? Twenty-four.

We are simply looking at a market that, by all accounts, is enormously overbuilt. Cities around the country are discounting convention center rates, and in a number of cases, literally giving away the space for free.

That was the other thing I was going to ask you about. Obviously it's not just a question of how many conventions you hold, but whether or not they pay full rate.

Well, increasingly nobody pays full rate. I'm finishing up a piece for Brookings looking at precisely this phenomenon, and tracing the recent performance of 15 or 20 major centers around the country. What folks have not much noticed buried in the Price Waterhouse Coopers feasibility study is that Javits has seen a significant decrease in its business, from about 1.4 million annual attendance to 1 million.

I'm sure that they would argue that that's because it's too small to book the larger conventions.

They'll never get larger conventions. Even the convention centers that have expanded - Las Vegas, for example, expanded its public convention center, adding a million square feet to a million-square-foot center. So with double the space, as of January 2002, what happened to the attendance at the Las Vegas Convention Center in 2002? It went down. And what happened in 2003? It went down again.

So this is the question everyone always asks me about stadiums, but: If it's such a terrible deal, why is everyone rushing to do this?

Because this has nothing to do with the ostensible public argument or economic discourse about job creation and importing spending, and everything to do with the politics of land development. A fact that is, in the case of Javits, all the more obvious, for the enormous impact on adjacent private development that Javits has had in the years since it's been opened - and that is to say, essentially, nothing. You can't get a hotel room nearby. You can barely get anything to eat nearby. If all of these people are coming, with all of this money to spend, why have they not generated much new private development?

The answer in the case of Javits is they're really not coming, and they're really not spending. In fact, the Javits center is notable because it has about the lowest yield of hotel room nights to attendance of any center in the country. The argument typically goes that all of the attendees are coming from some distant place, staying lots of nights at hotel rooms, and leaving lots of cash behind. But a great many of the events that happen at convention centers, particularly in the case of Javits, are trade show events, not professional meetings, in which you come in, do a turn or two around the exhibit at the center, and leave. In that case, particularly given Manhattan's hotel rates, it's easy to get into Javits, spend a day or two, and go.

At the same time, many of the events at Javits attract folks who are already in the metropolitan area. Those folks might invest in subway fare, or take a PATH train across the Hudson. But what they're not doing is spending lots of money staying over.

So do you have a sense of why this has such political support?

These things have enormous political support in lots of places. If you go online and rummage a little bit, you're going to get some numbers on how the new Boston center is doing. They were supposed to do over 300,000 attendees this year; they'll actually do something on the order of 50,000. Four events this year. They now have about 50 booked through 2010, of which half are events that were already in Boston.

That's important to understand: If you have a bigger center, you give George Little and Reed Exhibitions and the other folks in the business more space to sell. It's great for them. But you don't necessarily draw more people. The assumption, which I take apart in some detail in the piece I'm doing for Brookings, that the business is constantly expanding so you need to keep up, is a lot of hooey. It stopped expanding a while ago, and it's not clear there's anything to keep up with.

So how do the consultants justify projecting huge growth?

It depends on which consultant, and which city, and what they're arguing. I just had a conversation with one of my former students who's now a news reporter here in San Antonio, which is talking about substantial public funding for a 1000-room headquarters hotel. And the consultant turned in a report on how San Antonio lacks a major headquarters hotel. Now, there's a 1001-room Marriott directly across the street. And they termed that not a "headquarters hotel" but a "primary hotel." It turns out, however, that in two previous studies, one in Denver, one in Fort Worth, by the same consulting firm, in a table constructed in exactly the same way, that hotel is listed as a: headquarters hotel!

Have you seen anywhere that a city has put money into a convention center, and it's actually been money well spent?

There are two places that have historically done well in expanding their convention business: that's Las Vegas and Orlando. And historically, they have managed to grow their business with great regularity. New Orleans for a long time in the 1990s seemed to be successful. Anaheim and San Diego may, but because of a lack of available information that I've been able to get my hands on, it's not entirely clear.

But there's something in common certainly about the first two of them, and to some extent, about the other three, that's worth noting.

You also did say that Las Vegas just doubled their space, though--

And there I would argue that in fact the historical performance clearly is no real guide to the current market environment.

So would you say that we've really tapped out the need for convention center space? Is there any need for anybody to build anything, or is there enough room for everybody to rattle around at this point?

Let me put it this way. If we're talking about large centers seeing attendance declines on the order of 40 or 50% or more, the question becomes: Even if the economy has turned around, even if people do start traveling more regularly, even if the convention and trade show business has not seen substantial erosion by the changes in various economic sectors, changes in the popular desire to travel, changes in technology and communication, it's going to take a while of double-digit growth to get those cities back to where they were four or five years ago. And once they're back there, assuming they get there, there are two other things. First, between now and then, we know there's more space coming on the market. That's in the works - the bonds have been sold, that steelwork is up.

Secondly, even if you get back to where you were, you still have to compete with everybody else who has space. And again, centers are engaged in a price war. The internet brings every day news of a center that's offering its space for free. If a place like Dallas is offering rebates on hotel rooms, where does that leave the most expensive destination in the continental U.S.?

Recently by Neil deMause

Stadium activist groups

Blogs 'n' things

Stadium and arena info

Stadium economic studies

Olympics watch sites

Related corporate subsidy sites

Old stuff