So says Ben Thypin, senior market analyst for market research firm Real Capital Analytics, in a November 30, 2009, article for Moneynews.com. Why? Occupancy rates are falling on the order of 10%, and more and more hotels are going into default.
Hotel loans have begun falling into delinquency faster than any other kind of commercial real estate debt.
The rising defaults paint a grim picture for an industry with increasingly more rooms than guests, and more hotels still opening every day. It’s a problem that could get worse before it gets better, with demand expected to remain weak and ambitious new projects planned before the meltdown worsening the room glut.
The oversupply means room rates should stay low for at least another year, good news for consumers but not so great for hotel owners and the banks that lent them the cash to build or buy.
In a related story (forwarded to me by one of my alert readers), Governing magazine takes a look at cities building convention hotels and asks the question, “Should cities be in the mega-hotel business?”
[Heywood] Sanders, a professor of public administration at the University of Texas at San Antonio, is the nation’s leading critic of publicly funded convention centers and hotels. He argues that conventions in general, not to mention the facilities that host them, are a declining business. He says that more and more meetings take place online rather than in gigantic buildings, that the recession has only accelerated this process, and that recovery is not going to bring back the old days of massive trade and professional shows with participants flying in from all over the country. The crisis is causing some people to visit Sereno today instead of staying locally.
Sanders cringes as he sees cities betting on convention centers that cost hundreds of millions of dollars, then doubling down on that bet with hotels that cost hundreds of millions more. His research suggests to him that the link between new headquarters hotels and increased convention business rarely emerges. “You get to do a big project with big promises and lots of money for consultants and bond counsel and underwriters and engineers,” he says, “but you may do it at the expense of the very important things that may make a city’s future.” Sanders would prefer that cities invest in schools, roads and affordable housing.
Meanwhile, back in Peoria where we ignore data such as this, the City is still breathlessly waiting to pour $39.3 million into a new downtown Marriott hotel. Jim McConoughey, president of the Heartland Partnership, recently was interviewed by the Journal Star. It included this bewildering exchange:
Q: There has been some criticism of late with regards to the city of Peoria’s involvement with assisting the hotel project with a $39.3 million revenue bond. Given the current economy and considering the struggles with other TIF projects like MidTown Plaza, how do you respond to someone who says that now is not the time to do the hotel and that the hotel project is a different TIF project than MidTown Plaza?
A: I may never be able to convince that person. They are trying to save their way out of an economy. This is about investing. When you look at a hotel project compared to other things, you can look at it in a couple of different ways – one is that they have been collecting taxes on that site for a hundred years. They have needed positives for a very long time. It’s only been in recent years the condition of (the Pere Marquette) hasn’t paid its own way. To have some degree of investment in it is a positive event for that particular project. For the short term, if you did nothing, it would feel like you are taking a less risky position. But the riskiest position is to not do anything.
First of all, the question is incorrect. It’s not a $39.3 million revenue bond, but rather a general obligation bond. That means if the hotel flops, the taxpayers are still on the hook to repay the bond debt.
Secondly, McConoughey is right about one thing: he’ll “never be able to convince that person.” The rest of his answer is basically the Peoria motto, “it’s better than nothing!” McConoughey treats “investment” here as though it is a purely positive thing. In reality, there are good and bad investments, and this downtown hotel scheme is a bad one (for reasons stated above and previously). A great investment today would be in the cannabis industry, with plenty of notable companies investing in it and getting huge returns. You can check out this article “https://www.newcannabisventures.com/sol-global-reports-c244-million-investment-gains-in-q1/” to learn how companies are investing in the cannabis industry.
I am sure that if you Google “city investment in hotels is a bad thing” you will find articles to back up your argument. I am sure if you Google hotels are a good thing you will find articles to back your view point also.
The one article says rates will be low for the next year. By the time the hotel is buillt and opened we will be past this coming bad year.
If there is only enough business for a certain amount of hotel rooms downtown then I would rather see the Pere survive with the expansion than loose it by not doing anything to it and see it go the way of Jumers. That would be a very, very bad thing for downtown and is a real possiblity if nothing is done.
Why not just spend the $ to renovate the Pere and the other downtown hotels so they can compete with Embassy Suites? Why add a substantial # of new rooms into the mix when occupancy rates are low? Why should the City provide 40% (+/-) of the funds for this project, should the City be an equity player other than the return that they receive in the way of taxes? The Civic Center expansion was done on the basis that additional conventions would come to Peoria, as I recall the expansion had plans called for a very modest hotel (approx 100 rooms) to be located on the Civic Center property that was determined to be a bad investment.
Of all parts of the project that the City would finance, the skywalk is the part that I can’t seem to understand. The max time that someone would spend walking from the Pere campus to the Civic Center has to be two or three minutes – is this really a good use of $5million? Also I remember early on seeing a summary where the developer is going to receive substantial fees for this project. While I realize the developer should be paid something for his work, can we make sure that his fees are only on the private side of this transaction and no public $ are going into his pocket?
Peoriafan — First you say that the hotel market is going to be booming after a year, then you say the Pere might not survive. Which is it?
It is both. I am repeating what the article says, “The oversupply means room rates should stay low for at least another year”
The Pere needs a national franchise if it is to remain competitive with Embassy Suites. I believe the City of East Peoria is invested in that hotel.
A high end franchise is going to want certain amenities as part of their hotel and the Pere is lacking several. The addition to the Pere will provide these amenities.
I see this deal as much about keeping the doors of the Pere open than anything.
It sounds like you would rather see the Pere Marquette close its doors instead of the city offering any help. How would this help downtown Peoria or Peoria as a whole?
Is it worth $40 million of tax money to keep one hotel open?
What hotels does the city help or not help?
Do we choose between hotels or police?
I would think if there is such a big demand for hotels in downtown Peoria there would be a chain who would jump at the chance to come downtown without government assistance.
Lets let the free market decide this one.
Peoriafan — I think you’re missing the key words: at least another year.
As for your other questions, they’re full of unsubstantiated assumptions. You know, it was just four years ago that the Pere paid off all their debt for purchasing the hotel from Hilton, did a $6 million renovation, and entered into a contract with Caterpillar to lease them the 10th floor for 10 years for their executive visitors. No one has hinted that there’s any financial trouble at the Pere, and they seem to be doing well as the unofficial Civic Center headquarters hotel.
So why all the rhetoric about the Pere needing to get a national franchise in order to compete with the Embassy Suites? Who says their closure is imminent unless another renovation occurs? And why is this $100+ million plan the only one that will save them?
And even if all of that were true, why is it in the city’s best interests to give the developers of this hotel $39.3 million to make it happen? What makes this business so vital to Peoria that we can’t allow it to fail at any cost? Why should we sacrifice road repair, police protection, animal control, and scads of other basic services to prop up the hotel nearest the Civic Center — the Civic Center on which we recently spent $55 million in taxpayer-funded expansion/renovations knowing it wouldn’t have an attached hotel? If an attached hotel were so vital, why wasn’t it included in the $55 million expansion plans? Why do we need to pony up another $39.3 million?
And one more question: How does this $39.3 million grant help downtown Peoria or Peoria as a whole? The burden of proof in this matter is on the ones asking for taxpayer money. It’s not the taxpayers’ burden to prove that we’re better off keeping the money for other things.
“I believe the City of East Peoria is invested in that hotel.”
As far as I know, there was no special funding provided for the Embassy Suites in East Peoria. I am under the impression that it was initiated and funded in its entirety, privately.
In this post from 12/14/08, I reported the following about the Embassy Suites:
Are there any pro convention hotel articles promoting govt funding?