Convention Center Performance Review

Has 'new and improved' paid off for cities vying for meetings business?

ChicagoSan AntonioHilton Branson Convention Center in Missouri

 

Left to right: Chicago's McCormick Place, San Antonio's Henry B. Gonzalez Convention Center, Missouri's Hilton Branson Convention Center

  

 

 

 This is the last in a three-part series on the economics of the meetings industry, following “Gauging the Value of Meetings” (January) and “Where Bed Taxes Go” (February).

The decision to spend hundreds of millions of dollars of public funds to build or expand convention centers is never an easy sell to taxpayers. Complicating matters is the fact that, once built, most centers are designed to lose millions more each year in operating deficits, with the promise that groups ultimately will more than make up for the loss by boosting the local economy during their stays.

The hard sell hasn’t prevented cities -- from Boston to San Diego, from Anchorage, Alaska, to Erie, Pa. -- from investing in new or expanded facilities. As of last July, Tradeshow Week pegged the total amount of exhibit space in the United States and Canada at 85.9 million square feet, up 11 percent from 2003. Limited growth is expected to continue for the next few years.

Some critics say supply is outstripping demand. Proponents of new centers believe that’s irrelevant, arguing that individual buildings don’t need to compete against all of the rest. Centers square off against those with similar capacities, or within a geographic region, or in destinations with similar attributes or attractions. Buildings also compete against their own track records. The most common argument officials make in support of expanding centers is the fact they’re losing groups that have outgrown the building.

“It’s not about an arms race,” says Richard Scharf, president and CEO of the Denver Metro Convention and Visitors Bureau, who oversaw the Colorado Convention Center’s latest expansion in 2004. “It’s about what expansion can do and how it can help you grow market share. It’s very individual to each city. Each city has its own fingerprint that’s completely different from everyone else’s.”

While market conditions might be unique to each city, all centers are designed to be engines for economic activity and growth. But existence doesn’t guarantee success. “If you’re a politician, the fear is you’ve invested in a white elephant,” says Jim Kaatz, partner at Wayzata, Minn.-based Convention, Sports & Leisure International, a consulting firm that studies convention centers. If buildings don’t perform well, the economic burden on cities is compounded: Not only do municipalities fail to attract anticipated visitor dollars to support local businesses, not only do they fail to generate enough tax revenue to cover the debt incurred during construction, but they’re put on the hook to cover ever-growing operating losses.

As the country braces for recession and as challenges continue in the real-estate and debt-capital markets, the decisions to invest in convention centers and the process of building them will only get tougher. And more attention will turn to cities that recently have taken the plunge; soon, they’ll be asked: Has the investment paid off?

Following the money

An analysis of convention centers begins with the funding model. “When you look at a project, you have to look at who’s actually paying,” Kaatz explains. For most cities, he notes, “the whole objective is to tie as much of the economic base to visitors as possible.” A typical arrangement calls for a dedicated hike in the hotel tax, the reallocation of some of the existing hotel tax to fund the center, a car rental fee and possibly other surcharges on select businesses, such as restaurants. Still, most centers require public operating subsidies.

Although visitors end up footing most of the bill, it’s misleading to talk about convention centers as “self-funding,” argues Robert Canton, Tampa, Fla.-based director of sports, convention and tourism services for PricewaterhouseCoopers. The activity within the center rarely covers the operating costs or bond debt, he says, and tax windfalls are generated in large part by leisure and business travelers who aren’t in town for conventions. “All the other economic activity” -- jobs and businesses created to support center operations and clients -- “is what justifies investment,” Canton explains.

A common argument against building centers -- that cities should invest the money in education, for example -- is largely specious. In most cases, cities don’t have the cash lying around; they create revenue streams to fund the projects only because businesses that benefit from the centers agree to additional taxes and fees.

In some cases, however, money for centers does come out of existing municipal coffers, and an argument could be made that the dollars should be invested differently. In Philadelphia, where a $700 million expansion of the Pennsylvania Convention Center is under way, funding is coming out of the state’s casino revenue. However, the primary impact of convention centers is felt locally. “It’s hard to justify benefits for the entire state,” notes Jim Dunn, general manager of the Palm Springs (Calif.) Convention Center, which is city-owned and -funded.

The dispersal of funds should not be judged purely on economics, argues Steven Carvell, professor and associate dean at the Cornell University School of Hotel Administration in Ithaca, N.Y. “It’s a social and political issue,” he says. Cities could choose to build an office park that brings in high-tech, high-paying jobs, but convention centers support the hospitality industry, which employs a lot of low-wage and minority workers. “It’s a factor to consider when deciding how to spend public money,” Carvell adds. “It’s not just about getting return on investment.”

Nor can convention centers be expected to perform in a vacuum. In general, cities that make the best convention destinations are places that can draw visitors on their own. “Destination amenities are just as important as convention centers, as far as development goes,” Canton says. Cities that build convention centers in hopes that other development will follow are taking a larger risk and might have to wait longer to see a return.

Difficult data

Complicating the debate is the difficulty of assessing a center’s performance and its impact on the community once it’s built. Every metric is potentially misleading or susceptible to spin.

Take occupancy level or the number of events held. A convention center could be booked solid one year -- but with hundreds of small meetings that don’t drive much economic activity outside the building. On the other hand, a center exhibiting a downward trend in the annual number of events held might be booking groups that are larger, staying longer and spending more money. Furthermore, statistics don’t explain where the business comes from: A meeting that moves from a downtown hotel to the new convention center adds to the center’s performance record but doesn’t necessarily have a positive net impact on the city’s economy.

Attendance figures can be equally ambiguous. Many centers don’t distinguish between local and out-of-town guests; the latter are coveted because they bring new money into the local economy. Consumer shows draw large crowds but are attended primarily by locals, which can distort the value of attendance statistics.

If the debate ultimately revolves around money, one could turn to estimates of direct spend or economic impact as a measure of a center’s success, but these numbers often are based on national averages and can be even more unreliable.

One could compare actual performance of a center with projections made during the planning phase, but many feasibility studies make conditional estimates -- that the center will be a certain size or that a headquarters hotel be added -- that might not reflect what gets built.

Officials also look at tax revenues to prove that they’re generating enough money to cover bond debt or produce a surplus large enough to justify operating losses. These calculations can be tricky, though, encompassing not just visitor taxes and fees, but, for example, sales tax generated by visitors, income tax resulting from the employment of people working at the center and property tax on businesses supported by
the center.

In the end, most convention centers use number of room nights generated as a key indicator of their performance. But as it becomes easier to find cheap hotel rates on the Internet, official room blocks are shrinking, rendering room-night statistics a conservative, if not woefully incomplete, measure of a center’s true value.

An analysis of convention center investment begs to be more than a simple numbers game, especially when any numbers can be construed in favor of convention projects. If business is lagging, advocates argue expansions are needed to reverse the trend. If business is booming, supporters promise expansions will lead to even greater prosperity. A center’s success ultimately might have to be assessed within the context of the destination’s overall tourism industry, as one component of a larger strategy to attract visitor dollars.

A review of first-tier cities

During the slowdown in the convention industry exacerbated by 9/11, more questions were raised about convention centers as economic drivers. Now that convention business has rebounded, projects in top convention cities can be assessed more objectively.

Boston. James Rooney, executive director of the Massachusetts Convention Center Authority, already is thinking about future expansion at the Boston Convention and Exhibition Center, which opened in 2004 at a cost of $850 million. “We’re at the point where, over the next five years, we have sold out the prime dates,” he says. A team of consultants already is working on a feasibility study for an expansion.

Rooney has a complicated relationship with consultants. Chicago-based C.H. Johnson Consulting created a report in 1997 that projected the BCEC would be doing much more business than it’s currently attracting. The report helped to get the building approved, but in 2002, after construction began and plans for the center were downsized, Rooney disowned the estimates and began crafting new projections. “The Johnson report set up some expectations that I think are, at best, overly ambitious, and, at worst, impossible,” Rooney says. By Johnson’s standards, in 2007, the BCEC badly missed goals for the number of large events with 1,000 peak hotel rooms it hosted -- 20 instead of the projected 40 -- and attracted only 351,000 room nights, instead of the projected 539,568. At the same time, the BCEC held a greater total number of events and attracted more attendees than expected.

Rooney and Johanna Storella, CFO of the MCCA, point out that the Johnson report assumed the center would have 600,000 square feet of exhibit space to sell, while the actual building has 516,000 square feet with fewer divisible exhibit halls, and that the building still needs a few years to “stabilize” or live up to its full potential. “I think, considering we built a smaller building, we’re doing pretty well,” Storella says.

Furthermore, business at the once-threatened John B. Hynes Veterans Memorial Convention Center in the Back Bay area has remained so strong that the city is going to spend $18 million to renovate the facility.

Meanwhile, new hotels and restaurants have sprouted in South Boston near the BCEC, and mixed-use developments are moving forward, thanks in part to the center.

Chart of Boston convention statistics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denver. The Colorado Convention Center roughly doubled in size in late 2004, and the $270 million expansion was a quick success. The building already has surpassed benchmarks that consultants said would be achieved in 2009 and 2010, according to Richard Scharf, the CVB’s president and CEO. In 2006, Denver hosted nearly 321,000 convention delegates at 530 meetings, including 55 citywides -- all records. Last year, the city hosted 74 citywides, which alone drew 210,000 delegates. Prior to expansion, the record for citywides was 43, set in 1999.

Scharf says visitor taxes, after paying off bonds for the expansion, have generated a $17 million annual surplus for the city, far outstripping the center’s operating subsidy, which runs between $2 million and $3 million a year. The 1,100-room Hyatt Regency Denver at the Colorado Convention Center should begin sending profits to the city in the near future, he adds. Another indicator of success is the $800 million that’s been pumped into the hospitality industry and cultural institutions by the private sector since the Hyatt opened in 2006.

Chart of Denver convention statistics

St. Louis. Heywood Sanders, an outspoken critic of feasibility studies and convention center investments, singled out St. Louis’ America’s Center as a poor example of municipal investment in his 2005 report published by the Brookings Institution. A professor of urban development at the University of Texas at San Antonio, Sanders argued that projections used to support expansion plans and new hotels were consistently unrealistic. He criticized expansion proponents who claimed in 1999 that a new Renaissance hotel could boost convention business to about 800,000 room nights annually. (From 1996 to 1998, group business that used at least 1,000 peak room nights accounted for an average of 261,600 room nights annually.)

Things are brighter in the city now than when Sanders wrote the Brookings report, but the financial situation of the 1,064-room Renaissance St. Louis Grand & Suites Hotel, which opened in 2003 as a convention center headquarters property, remains tenuous, and America’s Center itself is pulling in less business from major conventions than it was prior to building the hotel, far less than the most optimistic projections that surfaced when municipal funds were needed. The convention center in 2007 hosted 28 major events that generated 244,000 room nights, better than the 211,000 room nights booked in 2004 but nowhere near the 300,000 mark reached in 2000 and 2001.

Whether the center would have fared even worse without the Renaissance or other recent upgrades at the convention center remains a matter of speculation.

Steve Stickford, senior vice president of sales for the St. Louis Convention and Visitors Commission, says he’s happy about the center’s recent uptick. He also notes that the CVC booked a total of 525,000 future room nights in 2007, about a 20 percent increase over 2006. “Without convention center facilities, many of these conventions that have 1,000 rooms on peak would not be here,” he says. “All the revenue would be lost.”

San Antonio. In March 2001, the Henry B. Gonzalez Convention Center opened a $218 million expansion that increased exhibit space to approximately 400,000 square feet. The number of room nights the San Antonio Convention and Visitors Bureau booked at the center immediately spiked.

In the two years prior to expansion, the CVB booked an average of approximately 318,000 room nights associated with the convention center. In 2002, room night bookings surged to 423,300, and since the expansion, CVB-booked business at the center has generated an average of 390,000 room nights annually, reaching a high of 459,000 in 2006. The CVB expects to best that mark this year.

The city’s overall meetings business hasn’t enjoyed a similar boom. Since 2001, San Antonio has struggled to generate more meetings-related room nights than it averaged in the three years prior to expansion. From 1998 to 2000, the city averaged about 700,000 room nights; since expanding, the city has averaged 680,000. Still, the overall number of delegates the CVB attracts to San Antonio now consistently surpasses totals prior to the center’s expansion.

Steve Clanton, vice president of sales for the CVB, says other factors need to be considered when assessing the raw data and the expansion’s economic impact. First, the convention center operated without a headquarters hotel until just last month, when the 1,000-room Grand Hyatt San Antonio opened the implication being that, now, the center and the city finally are equipped to maximize the return on investment. And although hotel inventory has increased in the city, occupancy levels have grown modestly as well, from 64.9 percent in 1998 to 68.5 percent in 2007. Considering only downtown hotels, Clanton estimates occupancy at about 78 percent. “I definitely attribute that to the expansion of the convention center,” he says. Additionally, the city is pouring hundreds of millions of dollars into the pedestrian-friendly Riverwalk that runs by the center. Clanton says consultants now are considering the benefit of adding another 100,000 square feet of exhibit space.

San Diego. Little needs to be said in defense of the San Diego Convention Center’s performance since doubling in size in 2001: It generates enough revenue to cover all debt and operating costs. Few centers in the country can make that claim. The center does receive some public funding, which, according to Steven Johnson, vice president of public affairs for the facility, goes to marketing (the center, not the CVB, is responsible for its own sales and marketing) and rental fee discounts offered to major clients.

Fiscal year 2007 was a record breaker for the center in terms of attendance (983,706), hotel room nights (738,758) and estimated direct delegate spending ($650 million). Prior to expanding, in FY1999 and FY2000, the center averaged only 683,000 in attendance, 537,000 room nights and $325 million in direct spend.

“It certainly has met all expectations in terms of attendance, and it’s been a true catalyst for changing downtown San Diego,” says Warren “Skip” Hull, vice president of San Diego-based CIC Research, which conducted economic impact studies for the center. Hull points to the Gaslamp district, new hotels, shopping developments and a condo boom as contributing to, and stemming from, the center’s success.

In January, Mayor Jerry Sanders announced support for another wave of expansion. Johnson says early plans call for the center to double again to roughly 1 million square feet of exhibit space in the next 10 years. “We turn away a year to a year-and-a-half’s worth of business each year because we don’t have space,” he says.

San Diego convention statistics

Washington, D.C. Large conventions at the $850 million Walter E. Washington Convention Center, which opened in 2003, have generated more than 430,000 room nights in each of its first four full years, including 766,000 in 2005. In the final four years of the old center’s operation, major shows generated as many as 275,000 room nights annually only once. The number of events, attendance and estimated delegate spending are all up in the new building, compared with the old center.

“The economic impact of this convention center is definitely stronger,” says Reba Pittman Walker, CEO and general manager of the facility. Still, the building’s performance has not lived up to original projections, in part because a headquarters hotel has yet to be built. “We realize it’s an extremely competitive environment, and we need to continue to up our game,” Walker says.

Her goal is to keep operating budgets close to or below $10 million, but she notes that tax revenue generated by convention groups offsets the deficit. Estimates by the Washington, DC, Convention and Tourism Corp. place delegate spending for large conventions at more than $400 million annually.

Washington, D.C., convention statistics

The scene in smaller cities

If any centers could be expected to perform well, it stands to reason they would reside in major metropolises with thriving tourism industries. But in smaller, more remote places, are centers capable of justifying enormous investments?

Hartford, Conn. The Connecticut Convention Center opened in June 2005, quickly followed by the connecting 409-room Hartford Marriott Downtown headquarters hotel. The $270 million center remains the cornerstone of a major development dubbed Adriaen’s Landing, which also includes a new science center and a complex of retail, entertainment and restaurant space, still under development.

The center itself is on target or has surpassed predictions by consultants, who estimated the facility would average 183 events in each of its first two years, including approximately 33 large conventions or trade shows. The center actually booked 362 events in its first year and 225 meetings in its second, primarily small meetings, while holding 31 and 27 large conventions or trade shows, respectively. Thirty-five large shows are on the books for fiscal year 2008. Total attendance was expected to be 413,300 over the center’s first two years; it drew a total of 492,745.

“I’m pleased we keep building on our own success,” says Jeanne O’Grady, director of sales and marketing at the center. She notes the building is hosting fewer events, but that’s because groups are consistently larger. “I see it going in the right direction,” she affirms.

More telling: Prior to opening the center, the city of Hartford sold some 44,000 hotel room nights per year. The center alone generated more than 43,000 room nights in its second year. Overall, the city expects to sell more than 100,000 room nights for FY2008.

Not all of that business is new to Hartford, however. Some shows have moved from the Connecticut Expo Center or the Hartford Civic Center, but O’Grady says all of those shows have outgrown the other facilities.

Palm Springs, Calif. The $34 million expansion and renovation at the Palm Springs Convention Center in the fall of 2005 was modest by comparison to some other projects, but the impact has been felt, says general manager Jim Dunn. Business peaked in 2000 and 2001 and fell off in subsequent years, and when the center was about to open 2005, it was booking close to 45,000 room nights annually for future years. Expansion has helped: In 2007, the center booked 92,000 room nights for future years.

Dunn says it won’t take many convention groups to generate enough money to recoup the investment.

St. Charles, Mo. The $32 million St. Charles Convention Center opened in April 2005 with 66,000 square feet of exhibit space. The center has hosted about 100 more events per year than consultants predicted in 2003, and attendance hit close to 190,000 people last year, outpacing early estimates by 14,000. The building was budgeted to bring in nearly $3 million in gross revenue in 2006, and ended up generating $4.2 million. That figure increased to nearly $4.9 million last year. The center has been responsible for booking 20,000 room nights each of the past two years. “Prior to our opening, the market did not have a venue like ours,” says Jonathan Frost, marketing manager for the center. “There was a demand but no supply prior to our coming online.”

Still growing

More time needs to elapse, and more data collected, before valid assessments can be made of centers or expansions that opened in 2007, including facilities such as the Branson (Mo.) Convention Center, the West Building at McCormick Place in Chicago and the Bayfront Convention Center in Erie, Pa., among others. But early returns are positive.

In Chicago, David Causton, general manager of McCormick Place, says the downturn in 2001, coupled with the fact that Las Vegas and Orlando, two main rivals, have expanded “exponentially,” explains why the center’s numbers fell between 2000 and 2006. Number of events, attendance and net square feet all dipped, posting a small rebound in 2006 after bottoming out in 2005. The new West Building will allow McCormick Place to book business it currently turns away during peak dates, and host multiple events throughout the year, Causton says, adding that the new space already has helped McCormick Place pick up major convention business that otherwise wouldn’t have booked in Chicago.

But high expectations can lead to disappointment. Some centers add massive expansions just to keep business at current levels Ñ and get criticized by people who expect business to increase at the same rate as exhibit space supply. Officials in Anaheim, Calif.; Detroit, and Salt Lake City have all expanded or hope to expand their centers, largely to retain a single convention that threatens to outgrow the current facilities. The loss of the NAMM Show in Anaheim, or the North American International Auto Show in Detroit, or the Outdoor Retailer shows in Salt Lake City would be huge blows to the local economies. Sometimes investment is required just to keep things where they are.

That’s the real issue surrounding the whole idea of convention center investment, according to Cornell’s Carvell: What if cities do nothing? “Everything stops if you don’t reinvest,” he says.

Jim Townsend, executive director of the Tourism Economic Development Council in Detroit, who’s working to get the Cobo Center expanded, believes a paradigm shift is required. Convention centers should be considered an expense, he argues, not an investment. “If people are not willing to mobilize public resources to maintain the property and upgrade and expand, then what kind of future are we talking about for the metropolitan area?”

Which centers will turn out to be the best, or worst, investments? It’s anyone’s guess. Just about the only certainty is that the public money cities raise to open new or expanded centers is just the beginning of the investment.