With the new Washington Convention Center open, District officials are about to embark on an expensive public-private deal to build a 1,500-room hotel next door despite little evidence that it would help the local economy and warnings from some economists that it could diminish the center's spinoff benefits.
D.C. economic development officials said it is necessary to invest public money to build the hotel because private developers won't put up the money for such large and expensive projects.
Supporters say the hotel is needed if Washington is to compete for large shows and meetings that want all of their attendees to stay on site to avoid the high cost of shuttle transportation. They also note that a convention hotel requires a lot of meeting space that typically generates no revenue, making it a less attractive private investment than other hotels.
But there are questions about whether the attendance at convention center shows will be high enough to fill a convention hotel. In other cities, convention hotels have led to reduced room rates at established competitors. Opponents argue that if the convention center hotel is so needed, it should be built without public assistance.
It comes down to an argument over whether the hotel is so vital to the convention center's potential that it merits public investment, or whether it is a high-risk venture that would be merely a convenience to convention-goers who would come to the District anyway.
"You need the hotel to make the convention center run smoothly," said John Emery, president and chief operating officer of Interstate Hotels & Resorts, a Washington-based hotel management company. "You need the rooms to handle the people . . . but there isn't enough demand on dark nights to fill that hotel up, so the headquarters hotel needs public support to make the numbers work."
Conversely, Charles W. McMillion, chief economist for MBG Information Services in Washington, goes so far as to argue that a convention center hotel could be detrimental to tourism. With a full-service hotel on site, convention attendees would have less reason to venture to restaurants, theaters and stores, he said.
"For the average taxpayer, it's money that's poorly spent," McMillion said. "The market is telling us something. They're saying that the need is not sufficient to meet the cost. It's a poor use of public money at this point to basically subsidize the competition for others in the hospitality business."
Two studies done for the District in 2000 helped make the case for a convention center hotel. A study by C.H. Johnson Consulting Inc. of Chicago said a "new, large headquarters hotel is a necessary ingredient," considering the size of the convention center. The other study, by PricewaterhouseCoopers, said "demand growth will outpace supply growth," even with an estimated 1,500 more hotel rooms opening in the next few years.
The Johnson study said the convention center, with 725,000 square feet of exhibit space and 67 meeting rooms with 150,000 square feet of space, was big enough to warrant a headquarters hotel.
While Washington's hotel supply is "one of the best" compared with other cities, its largest hotel -- the 1,348-room Marriott Wardman Park on Connecticut Avenue -- is almost two miles away from the convention center, the Johnson study noted. The closest hotel is the 900-room Grand Hyatt, which the study said is not big enough for groups that like to put all their people in one hotel.
The Johnson study does not say much about what economic impact a hotel would have on the surrounding area. D.C. officials have said it would generate substantial tax revenue.
The Washington Convention Center Authority said it plans to host 33 shows this year, with 351,000 attendees. Out-of-town attendees are to stay in the 64,000 hotel rooms in the D.C. region and are expected to generate 302,500 room nights. The PricewaterhouseCoopers report in 2000, however, projected that bookings at the new center would create a need for 500,000 room nights.
Even in its "stabilized" year of operation, 2007, the convention center is expected to generate 358,000 room nights -- only 55,500 more than the District's existing hotels are expected to accommodate in 2003. Even if the convention center hotel gets a lot of business from every show booked at the convention center next door, it will still have to fill its rooms with non-convention business such as smaller meetings -- the same groups that other large hotels in the District go after.
That, opponents said, has been shown in other cities across the country to hurt established hotels.
A 500-room Sheraton Grand hotel in Sacramento, next to the city's convention center, was built with $100 million worth of bonds, sold by a quasi-public arm of the city and backed by revenue from the hotel.
After 21/2 years, the Sheraton added more convention-related room nights, about 20,000, to the city, but it caused room rates and occupancy levels to drop at competing hotels. The Sheraton's average occupancy was 67.3 percent, with an average daily room rate of $124.51. That performance was only slightly lower than original projections.
But occupancy and average daily room rates dropped at the Hyatt, Holiday Inn, Doubletree and Hilton hotels, all of which are near the Sheraton. Room rates for the four fell an average of 10 percent from September 2001 to September 2002. One hotel's average rate dropped $20 and occupancy fell to 74.3 percent from 78.1 percent during that time, according to a report by PKF Consulting of Atlanta for Sacramento economic development officials.
"The publicly subsidized Sheraton squeezed its competitors in the market," said Heywood Sanders, an urban affairs expert who has studied the effects of convention centers on major cities and is chairman of the University of Texas at San Antonio's public administration department.
The city of Philadelphia paid $40 million for land and then sold it to Bethesda-based Marriott International Inc. for $3.5 million and allowed it to build a 1,400-room hotel on it in 1995. There has been little evidence that the hotel attracted more and bigger conventions as promised, economists and hotel experts said. In fact, attendance and the number of conventions has dropped steadily since 1997, according to a report done by Sanders.
Even with demand for hotel rooms from large, big-spending groups, private companies are leery of investing much in convention hotels for the same reasons as lenders: They want to get sizable returns on their investments.
In a proposed $400 million deal, the size of the Washington project, a hotel company would want to see a return on investment of $40 million to $48 million a year, as measured by earnings before interest, depreciation and amortization. However, according to hotel executives at major chains, the reality is more likely to be that a convention hotel of that size would generate $25 million to $30 million a year. To make a deal work, a hotel company would want the District to make up the difference in a form of a subsidy or guarantee on bonds.
Washington officials propose to structure the deal much the way cities such as Chicago, Denver and Austin have. They would create a nonprofit entity to sell the bonds to pay for the hotel.
The bonds would be paid back from hotel revenue. To ensure that the project gets Wall Street approval, the D.C. government probably would have to provide some form of credit-enhanced financing to guarantee the bonds.
The money from the District probably would come from tax revenue from an area around the convention center. The District's money would be used to repay the bonds only if the hotel revenue was not sufficient to do so.
According to the Johnson study, a 1,500-room hotel would generate $135 million in revenue in 2008. After paying its annual debt service, the hotel would be likely to run a $34 million deficit. To meet those numbers, the study said it assumed the hotel's occupancy would be 71 percent and charge an average daily room rate of $215.
How much hotel developers would invest in the project would affect how much the District puts into a subsidy, the study said. The subsidy expected could range from $10 million to $35 million.
D.C. tourism officials had said they wanted the hotel to be open this year or next. But the hotel project was put to the side as the rush to get the convention center open by March took over at the end of last year.
After the Sept. 11, 2001, terrorist attacks, D.C. officials decided to wait to choose a site for the hotel because tourism profits fell significantly. Baltimore economist Anirban Basu said financing for new hotels became increasingly difficult to obtain.
"That created this level where government participation is more appropriate than would typically be the case," he said. "For D.C., the community has invested quite a bit of money in this new convention center. If it is not followed up with a new convention center hotel, it can have some severe consequences."
In October, the D.C. government chose a team led by Marriott, JBG Cos. and local developer Kingdon Gould to build a hotel in the 900 block of Massachusetts Avenue NW, next to the convention center.
D.C. officials said they waited until last fall to announce the team because they wanted to make sure the hotel industry was recovering, and to focus on getting the convention center open by March.
"Some could argue that we set it back by years, but I would counter that since we've gotten involved in the process, we've done a lot of work to move the project forward," said Eric Price, deputy mayor for economic development, who is overseeing the hotel project.
"There's so much energy that went into the convention center and getting it done," Price said. "In hindsight, yeah, you would have tried to plan the two -- the hotel and the convention center -- at the same time."
Any government-backed money for the hotel would require D.C. Council approval.
The Washington Convention and Tourism Corp. said it has promised dozens of groups that the headquarters hotel will be built by 2007. "We could lose pieces of business that are already on the books because of the commitment we have that there will be a headquarters hotel open," said William A. Hanbury, chief executive of the tourism group. "If there were significant delays in getting it built, we'd run the risk of losing groups."
Hanbury said his sales staff plans to book more large groups, with attendance of more than 20,000 each, for when the headquarters hotel is open.
Sue Sears Hamilton, a meeting planner, is watching what happens with the hotel as she ponders whether to bring 30,000-plus cardiologists to Washington for their annual meeting in 2013. She estimated that having a headquarters hotel would save her group $300,000 it would otherwise have to spend to rent shuttle buses to take visitors across town to their hotels.
"We've never had our meeting in D.C. because the convention center wasn't big enough, but now with a new, larger one, we'd like to come," she said.
Washington would be a good place for her meetings, she said, because of the cultural activities, the size of the center and the opportunity to lobby Congress. "We'd love to have a meeting in the nation's capital," Hamilton said.
Staff writer Manny Fernandez contributed to this report.