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Will the Convention Center Hotel Market Heat Up?
Portman Holdings predicts more RFPs to come as cities invest in new projects.
Tuesday, August 09, 2011
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Cities from Los Angeles to Kansas City to Palm Beach are considering adding convention center hotels, welcome signs of life for developers.
“The convention center business as a whole continues to grow,” said Charles Pinkham III, vice president of development at Portman Holdings, a real estate development company. “The pace of that demand is outgrowing the supply, both in convention space and hotel space. Convention centers really flourish when they have adjacent headquarter hotels. On top of that, large, significant convention center hotels can really drive revenue.”
Pinkham said he expects to see a handful of cities approve RFPs this year.
“These projects have been on the minds of cities for quite awhile, but because of the downturn they’ve held off,” he said. “The economy as a whole has had some struggles. People aren’t as eager to hop on a plane and attend a convention. But the convention business continues to grow. As much as media continues to grow and technology continues to grow, to get the biggest deals done and have the most honest and flourishing relationships, it’s still a face-to-face business. Conventions give a great platform to have several of those face to face meetings at the same time.”
With a specialty in convention center hotel development, Portman would know. The firm has built big box projects in coastal gateway cities across the United States, including the Marriott Marquis hotels in New York and Atlanta, and has worked with other major brands including Hilton, Hyatt and Starwood. Pinkham credited the firm’s founder, John Portman, with inventing the atrium hotel concept with the Hyatt Recency in downtown Atlanta.
Portman also has a global reach, which started in Asia in the late 1970s. It was among the first foreign developers in China and counts among its projects the Shanghai Center, a 2 million square foot mixed-use development that includes the Portman Ritz-Carlton.
“We’ve been in the convention center business since the beginning,” Pinkham said. “A larger part of what we’re doing today is still the convention center hotel development. We see a great need for it and we see a lack of supply. Cities continue to expand convention centers. They need the rooms tower adjacent so they can bring people in and give them one place to stay. There’s a lot of synergy between those two products. The hotels supply convention centers with additional meeting space, so it almost acts as one cohesive unit. This does well for the city because the conventions bring the hotel business and the hotels bring the conventions business.”
Because of the large price tag for these projects, cities typically participate in the projects with an investment, typically by selling bonds. Having municipal investment brings the total construction price down or equity requirement down and gives comfort to the banks, Pinkham said.
“Then they will start to look seriously at the construction financing,” he said. “When you have municipal support, that will bolster your economic returns, so you can attract large institutional investors to these deals because they are de-risked.”
For example, Pinkham said a $300 million hotel project with a $50 million commitment from the public may entice banks that have been focused on acquisitions to finance new construction because they can build under replacement cost.
“It’s not that the city or county or state is giving away money, because they are not. They are truly making an investment that they get a significant return on with the new business and the tax revenue that comes from it,” Pinkham said. “They’re basically underwriting tax revenue. We will bring in a financing consultant to help structure this so the city, the county or the state gets a very attractive return on their investment.”
The financing stake is more important than ever. As the economy has changed, so has the criteria that cities look for in a hotel development partner when they request proposals.
“Ten years ago the focus was on expertise in development and design. Now, while that’s still important, the primary focus is on financing,” Pinkham said. “Because it’s so difficult to get these things done, they want to see a financial package in place that frankly will prove you’ll finish the project. As debt financing and equity financing becomes more and more available for hotel development, the priorities will shift, but they really want a full package.”
Public entities also are taking fewer chances with their development partners. RFPs now often are written to limit the bidders to companies with previous experience building 1,000-key hotels.
“The business is alive and well,” Pinkham said. “It’s really our bread and butter. It’s not our only business, but we will always work on building convention center hotels.”
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