1. Does a new “convention headquarters” hotel generate additional market demand?
2. Are they financially feasible?
3. What is the impact on other downtown hotels?
The conclusion is that “convention headquarters” hotels are far riskier than most municipal leaders think.

In their scramble to compete for convention business, cities throughout the country have bought into an assertion, even a myth - “build it, and they will come” - to justify the building of large “convention headquarters” hotels. This research study scientifically explodes this myth. The increase in market demand generated by these hotels is an absolute zero.

On that question, the study examines the economic impact of every large convention hotel built and opened in Texas, since 1980, a total of 16 large properties in four major cities (Houston, San Antonio, Austin, and Dallas). For each hotel, the study used three barometers of demand: market growth trends, market share, and market occupancy rate.

Market growth trends refer to the annual percent of increase in hotel room revenues before and after the new hotel opened. If the new convention hotel is generating its own market demand, its opening would spike total market revenues and therefore the growth trend. In none of the sixteen hotels studied did this happen. Market growth trends remained constant.

Market share refers to the percent share a downtown convention business district has of the total metropolitan area market. If the new convention hotels in their respective downtown business districts were creating increased demand, downtown market share would be expected to increase. It did not. In all four cities, the market share of the downtown business district stayed the same.

Occupancy rate is the percent usage of the total available rooms. If the new convention hotels were generating their own market demand, it would be predicted that the occupancy rates in the cities studied would either go up or at least be unaffected, as the new hotels “carried their own water” in terms of demand. They didn’t. Instead, the occupancy rates in all four cities dropped dramatically whenever a major quantity of fresh new hotel rooms was dumped on a market where demand trends remained constant. On the second question of financial feasibility, the proposed “convention headquarters” hotel in Dallas is a case study. We examined the cost of the project as outlined in the city’s own economic analysis and realistically projected its performance based on existing market occupancy and average daily rates … not the overly optimistic projections based on the specious “build it and they will come” theory. We assumed it would carry the Marriott name and marketing prowess.

As a result of our research, we conclude: “No private developer would undertake to develop this hotel project, as it is not a sound investment.” The study examines the project as a private investor would. It finds that the total cost of the hotel would be approximately $276 million, and based on a sound market projection, would generate a 6% return on investment, compared to an industry standard of about 14%. With the investors borrowing $193 million, at a typical 9%, the equity holders would realize only a 3% return on the $83 million they would have to put up in cash.

If the (Marriott) hotel were publicly subsidized, in order to give these investors a reasonable return, we estimate the cost to the city of Dallas at $108 million. There would also be an additional hidden cost of $10+ million a year in lost revenue from real estate taxes, as the property values of the existing hotels is diminished due to lost business.

The third question the study asks deals with this very issue – the negative impact on existing hotels, again using Dallas as a case study. Given that the “convention headquarters” hotel will be absorbing existing demand, the study reports that the existing hotels stand to lose $450 million in revenue and $190 million in cash flow in the first five years after the new convention hotel opens. For many, these losses will be unsupportable, resulting in closures and bankruptcies. Thus, instead of revitalizing the downtown business district, a new “convention headquarters” hotel will cause a decline of real estate values with more buildings standing empty.

The findings of this study can be summarized as follows:

• “Convention Headquarters” hotels do not generate their own market demand. They absorb existing demand.
• Using the investment criteria of a private developer applied to the Dallas “Convention Headquarters” hotel as a case study, the study finds that it is not a sound investment. As a publicly subsidized project, the city would assume massive financial risk for a minimal return.
• As a case study of the impact of a “Convention Headquarters” hotel on existing hotels in the same district, the Dallas hotel will be financially devastating to the existing hotels in the downtown district, causing extensive loss of revenues, reduced real estate values (and diminished tax base), and in some cases bankruptcies and closures.

We gratefully acknowledge the editorial and research contributions of Professor Heywood Sanders, Chairman of the Department of Public Administration, University of Texas, San Antonio, and Stan Hodges, Director of Tourism Research for the Texas Department of Economic Development, Austin, Texas.

Bruce H. Walker, President
Source Strategies, Inc.