Consequently, some hoteliers and industry observers question how much space is available in this market’s once sparsely populated top floor. “I’m very confident that the market can withstand one other luxury-type hotel. But when you add up all these other new products and luxury hotels, I think that’s going to have an impact on the marketplace,” says Graves, who predicts that everyone’s occupancy rates will slide—at least in the short term.
Morrissey also wonders where the new business will come from to support several new players downtown, which already has about 5,000 hotel rooms. “Do you see any tower cranes in Minneapolis? I don’t see any,” he says. “So if you’re going to throw, say, 15 percent of new supply into the market, all within a narrow bandwidth of style and price, chances are you’re going to wrench the supply side and put downward pressure on prices for everybody.”
Sherf, meanwhile, believes that the market is simply in a natural evolution. “From a hotel standpoint, it’s cyclical—it’s a 30- or 40-year investment. So as long as these hotels aren’t too highly leveraged, the next time the cycle goes down or the market begins to get overbuilt, they’ll probably just be facing a few years of restricted cash flow. But the market always seems to come back for most, while some of the obsolete hotels fall off,” he says. “That’s the cycle.”
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Hotel + Condo = Profit Many of the new local hotel projects reflect a growing national trend—high-end hotels that include residential condominiums. The Ivy Hotel and Residence, the Westin Galleria, Aloft and Zenith, and the Pacific Flats development all are slated to have a residential component. “The synergies between a full-service hotel and condominium residential living make each component more economically feasible,” explains Collin Barr of Ryan Companies US, Inc. Developers can sell condominiums before they start construction on their hotel projects; the revenue generated by the condo sales can help offset lenders’ equity requirements, which Barr says are often between 25 and 40 percent for hotel projects. The upshot for developers is that, nationwide, buyers are paying a premium price to have the amenities of a luxury hotel in their home, whether it’s room-service meals, guest rooms for out-of-town visitors, laundry or maid services, or someone to carry their luggage. And those amenities can profoundly increase the purchase price of the condominiums—by $50 a square foot, or more. “On a 1,000-square-foot condominium, that means you’re getting an extra $50,000 a unit,” says William Morrissey, president of Morrissey Hospitality.
Is There Still Room for a Convention Hotel? Of downtown Minneapolis’s 5,000 hotel rooms, more than 3,500 are connected by skyway to the Minneapolis Convention Center, and the new and proposed hotel projects promise another 500 rooms in the coming years. Even so, without a new convention headquarters hotel, Minneapolis will continue to lose convention-market share, says Greg Ortale, president and CEO of Meet Minneapolis, Official Conventions & Visitors Association (MCVA). “The market has outgrown us,” Ortale says. “In our competitive set, we have a 2,800-room disadvantage within walking distance of the convention center, compared to cities like Denver, St. Louis, Indianapolis, and others.” The primary problem is one of convenience, Ortale explains. Denver and St. Louis, for example, each recently built 1,100-room convention hotels, which can easily hold whole conventions or significant sections of large groups. Though the Twin Cities metro area has the capacity to accommodate conventions of, say, 3,500 people or more, groups that size have to be sectioned off in several hotel blocks—a meeting planner’s nightmare. Also, groups must incur the hefty cost of providing transportation for their people to and from the convention center. “Groups are finding they can get a much more convenient package elsewhere,” Ortale says. And that’s increasingly becoming a deal breaker. For the convention center’s fiscal year 2006, which Ortale described as “soft,” Minneapolis lost on bids for groups that, collectively, would have totaled more than 590,000 room nights. “We had been batting 50 percent. At 50 percent,” he says, “you’re talking close to 300,000 additional room nights, which would have made this a record-breaking year.” The Minneapolis City Council has suggested that if MCVA could interest a developer in the project, the council would evaluate it through the regular process. Ortale says that the incoming hotels are all too small (the largest one is 214 rooms) and too scattered to obstruct the MCVA’s forward progress. Some industry observers disagree. “Every room you add is one more room that is not needed by a convention hotel,” says Russell Nelson, president of Nelson Tietz & Hoye in Minneapolis. “So there’s no question that the 300, 400, or 500 new rooms downtown are a direct hit on the feasibility of a convention hotel.” Steve Sherf of GVA Marquette Advisors says that the success of a convention hotel would hinge on its ability to fill rooms on days when the convention center is dark. “But if we have three new hotels in downtown Minneapolis, it might dilute some of the downtown demand, so there won’t be as much demand to slide over to the convention hotel,” he says. Ortale remains optimistic. “I think, ultimately, we will see something occur,” he says. “I just don’t know when.” |
