Category: Convention Center Follies

Hotel consulting firm CBRE issued a paper on Friday on “When Will Convention and Group Demand Come Back?”, and its answer, unsurprisingly, isn’t “never, we should all find a different line of work.” The report acknowledges that the U.S. hotel industry is “facing its largest decline in demand in history,” with revenue per room in top U.S. markets down more than 80% compared to last year. But it then goes on to argue that the hotel business “may be out of the hole in a matter of three years.”

The reason for the optimism? No, it’s not the imminent arrival of Covid vaccines, nor a new hotel partnership with Lysol or Clorox, nor a sudden burst of public enthusiasm for hotel restaurant meals served in sealed plastic containers. “Once the pandemic ends, and it will end, these employees will need to come back and visit the office to collaborate with co-workers and build culture,” says the report, arguing that business and their employees will get so fed up with Zoom meetings, the wonders of Microsoft Teams, and Cisco WebEx that they will “demand more opportunities to connect in person … and conferences and conventions are ripe to benefit from the increased demand.”

After a lengthy review of the calamity the coronavirus pandemic has inflicted on hotels — particularly the large, big city downtown hotels that rely on group and convention business — the CBRE report then pivots to insisting that more people working at home will in fact stimulate more business travel. Remote workers, it notes, often feel isolated and miss non-verbal cues from coworkers, things that presumably can be cured with a quick weekend trip to a convention hotel.

The report then goes on to assert that “major conferences have already seen unbelievable growth over the past decade.” The evidence for that assertion? Exactly two cases: Salesforce’s annual “Dreamforce” conference South By Southwest in Austin, Texas.

The Dreamforce event, reports CBRE, has grown from 20,000 to 170,000 attendees in just seven years, in parallel with the success of Salesforce’s software and services. That’s been great news for San Francisco hotels and the Moscone Convention Center. But the actual story is a little more complicated. You see, Salesforce reported 171,000 attendees at the 2019 event. And 171,000 at the 2018 version. And for 2017, yes, it reported attendance of 171,000. Which was exactly the same number of attendees that the Salesforce blog said were there in 2016. It turns out that Salesforce reported 150,000 attendees in 2015.

So rather than booming growth over seven years, the Dreamforce conference has actually stalled out at the magical 171,000 for a bit. That’s still a whole lot of people, right? Yes — but not all of those people are visiting from out of town and filling San Francisco hotel rooms. The San Francisco Business Journal reported that the 2019 conference generated a total of 132,595 hotel room nights. That’s less than one room night per attendee — not what we’d see if most attendees were booking multi-night stays. In fact, a great many of the Dreamforce attendees are from Silicon Valley to the south, and the greater San Francisco metro area. They can drive, or train, or BART to the conference, and go home at night. And in 2020, they didn’t have to do even that — the 2020 conference was fully virtual.

Still, Austin’s annual South by Southwest event makes the case that people want to get together, doesn’t it?  SXSW’s “Event Statistics” for the 2019 two-week collection of conferences, events, and live music performances do show a total attendance of 417,400, although that may double-count some who attended more than one of the main conference, the music showcase, the film festival, the gaming event, the Wellness Expo, and SXSW EDU. But that same SXSW statistics summary shows a total of 55,339 hotel room nights booked. Again, lots of the attendees at SXSW are locals and daytrippers, not distant overnight visitors.

Indeed, the larger stories of Dreamforce and SXSW make precisely the opposite point from what the CBRE authors had intended. Americans do like to get together, for a variety of events and experiences. But that doesn’t necessarily translate into hotel demand. And the single best-attended portion of the whole SXSW enterprise is the music festival — accounting for 232,258 attendees in 2019, or 56 percent of the total — making it a better indicator not of business travel demand, but rather a measure of the demand for live music.

All this matters because even amid a pandemic that has turned a slow decline in convention demand into a total collapse, the convention industry is still seeking more public money to fund expansions. Just look to Cleveland, where the local convention bureau is arguing that Cuyahoga County should spend $30 million to refit its failed “Global Center for Health Innovation” to work as part of the adjacent convention center. Chicago-based Merchandise Mart Properties had promised some 300,000 medical meeting attendees annually and $990 million a year in “economic impact”; when that didn’t transpire, MMPI bailed on the project, and Cuyahoga County renamed the mart building the “Global Center” and added a $230 million Hilton-branded hotel fully owned by the county to promote conventions.

Now, the infamous Conventions, Sports & Leisure International (CSL) — the same consultants who once projected that Montreal would be an excellent baseball market without bothering to account for Canada and the U.S. using different dollars — have forecast that turning the failed showroom building into more meeting space for the Huntington Convention Center would bring $110 million in annual economic impact to the area. And all from an investment of just $30 million in county money, which would come from … somewhere. Because if one thing is a given in the convention industry, it’s that if at first you don’t succeed, just keep doubling down in hopes that doing the same thing and expecting different results will surely work eventually.

Things look grim for convention centers in Minnesota, reports the Minneapolis Star-Tribune. The management of the Duluth Entertainment and Convention Center is now resorting to promotion of its ventilation system rather than the “facility’s proximity to Lake Superior.” And in Minneapolis, Melvin Tennant, CEO of Meet Minneapolis, estimated that the city’s almost entirely empty convention venue will see a revenue drop of 75 percent this year. Terming the Minneapolis Convention Center “a catalyst for our hospitality industry,” Tennant joined his colleagues in seeking both federal government aid and some word on when state guidelines limiting the size of indoor gatherings would be eased.

In the interim, Meet Minneapolis is doing what convention centers and destination marketing organizations typically do — having a sale. With the bold headline “Get More for Less in Minneapolis,” Meet Minneapolis has been offering a host of incentives for groups meeting in Minneapolis next year. The convention center is offering a 20 percent discount on both rent and AV equipment, a $3.00 per room night rebate to the group for every hotel room used, a three percent rebate on hotel bills, and even a free round-trip Delta airline voucher — just to check out the city.

Whether the promise of sale prices and the boast that “Minnesota currently ranks #1 in takeout, curbside and delivery dining” are enough to get folks to Minneapolis appears seriously open to question as the coronavirus surges through the upper Midwest. But the city’s hotel business has been incredibly hard-hit so far this year between George Floyd’s death and the pandemic. Overall hotel revenue is down by 62 percent compared to last year — a drop just like destination cities in Hawaii. Maybe a half price sale next?

That enormous gnashing-of-teeth sound from the Puget Sound area? Those wails of frustration and upset from downtown Seattle? No, it’s not a response to the pandemic and its human toll, or even to the economic dislocation that has followed. It’s the pain of downtown boosters, Chamber of Commerce leaders, and local officials faced with the pressing need to find an extra $300 million to finish the $1.8 billion (yes, billion) expansion of the Washington State Convention Center.

The expansion, termed by the Seattle Times “one of the city’s largest-ever construction projects,” has been underway since 2018, with the goal of adding 440,000 square feet of new convention space, effectively doubling its current size. In the last week, the need for an immediate federal government bailout was promoted in the media by an array of dignitaries, with King County executive Dow Constantine arguing there would be “statewide” ripple effects if the expansion isn’t completed: “The visitor industry is the core of our regional economy, with the Convention Center at its heart.”

So how did a $1.8 billion convention center expansion end up needing federal dollars? In fact, how did an expansion of a modest convention center end up costing $1.8 billion? For that, you have to go back to 2008. An expansion in 2001 had utterly failed to produce the promised new business. But by late 2008 the center’s leadership had begun to promote another expansion, with board chair Frank Finneran claiming, “We are losing more business than we are booking.” At that point, the expansion cost was pegged at a mere $766 million. But the governor and state legislature were thoroughly uninterested, and actually raided the center’s surplus hotel tax revenues to make up a state budget shortfall in the wake of the recession.

Finneran, along with the business and labor interests that backed a larger center, approached the state government again in 2010 with a plan to shift from state control to ownership by an independent King County public facilities district, with funding from the area hotel tax. The state legislature blessed that plan, and the new district sold bonds to pay off the center’s debt, preparing the way for pursuing the expansion. And the new entity turned in 2014 to outside consulting firm Conventions, Sports and Leisure International (CSL) for a feasibility study and a forecast of the new business a bigger venue would attract.

CSL — those would be the same folks who forecast that Philadelphia’s big 2011 expansion of its convention center would bring 786,000 annual hotel room nights, a number that by 2018 remained at only about 370,000 — endorsed an even larger expansion than the one proposed in 2009, forecasting that it would bring an additional 22 annual international and national events, boosting attendance by about 79,000 to just over 220,000. With a bigger expansion came a larger pricetag: By late 2015 the projected cost was up to $1.4 billion. Still, an outside financial feasibility analysis concluded that growing local hotel tax revenues would be more than enough to cover the required annual debt service.

By 2018, with a better estimate of site acquisition costs, and a series of deals with neighborhood and community groups that added over $90 million, the cost estimate was now $1.73 billion and climbing. The district still planned to sell bonds, a total of $1.08 billion in July 2018. But it now didn’t have enough projected revenue to cover the full expansion cost. The district staff and board pressed ahead anyway, anticipating that it could sell a second bond issue, for about $168 million, in 2020. The district was warned in a May 2018 analysis that the “WSCC could be vulnerable to a potential economic downturn in the 2019-25 time frame,” but still went ahead without the money to finish the project. Simply put, convention center officials bet that hotel revenues — and hotel taxes — would keep going up, year after year, which was a little like promising the bank you’ll be able pay for that big, new house with the huge raise you’re sure to get next year. They lost.

Costs have kept growing, and with the convention center expansion now 30% complete, it needs $300 million more — money that the district doesn’t have and that it likely can’t sell bonds for. With Wall Street apparently not particularly interested right now in long-term debt backed by hotel tax revenues, for some reason, officials have turned to federal stimulus dollars on offer in the wake of the coronavirus pandemic; Washington state Sen. Patty Murray told KING5 that she is “working now to explore what can be done at the federal level to help support the project’s timely completion.”

The convention business has been on the decline for years, even as convention centers continue to expand to compete for a dwindling number of events — and it’s expected to take years to recover from the current bans on large in-person public gatherings, especially if organizers start experimenting with online meetings in the interim. Nonetheless, Visit Seattle president Tom Norwalk told the Seattle Times that his organization is “very confident” that demand for conventions will continue to be strong. Just what the federal government should bet on.