Aug. 24, 2003 - How is this for a quick change? Three years ago, Houston had four downtown hotels. By the start of next year, there will be 14.

They come in all styles -- hip, opulent, quaint, huge and thrifty -- and finding a room in one is generally not a problem; business is fairly bleak.

The sudden glut may be good news for travelers: Bargains abound. But can all these hotels survive?

A hotel isn't like an office building. It costs a fortune to run, and in its formative years, especially during a bad economy, negative cash flow can be devastating. It cannot sustain a drought forever.

In the near term, "we will see disastrous hotel performance results. It's going to be incredibly rough sledding," said J. William Sharman Jr., chairman and CEO of Bayou Equity, the developer and operator of the Lancaster Hotel.

But downtown hoteliers should not despair, because the future is bright, according to John Keeling, senior vice president at the Houston office of PKF Consulting, a national hospitality consulting group.

Much of the optimism hinges on downtown's makeover. In a little more than four months it enters a new era, if all goes well: Light rail will be rolling, major construction projects will be completed, the Toyota Center will be open, and the George R. Brown Convention Center will have doubled in size and be connected to a snazzy 1,200-room Hilton Americas Hotel.

They're all betting that a jazzed-up downtown will be a bigger convention and tourist draw.

Currently the patient is very ill, Keeling said, but like Lance Armstrong, the downtown hotel business will "rise from its sick bed and go on to win the Tour de France," although it will take until 2006 or 2007 to declare itself a winner.

At least a few hotels may wonder if they can hold out until then. For now they must fight over what little business exists.

Some are in better positions than others, either because of the desirability of their location or ability to draw on the strength of their corporate flag.

Many hotels have begun focusing more on group bookings, filling blocks of rooms at lower rates.

Sharman wonders how many can hang on and if the downtown hotel business will soon mirror the downtown restaurant scene in which a number of eateries -- the same ones that stuck out their necks to lay the foundations for the rebirth of downtown -- will go under, enabling second- and third-generation hotels to thrive.

It would be unfair to blame the new hotel owners for poor planning: At the time of their conception, no one knew how weak the industry would get.

Since the terrorist attacks in 2001, the travel industry has been reeling. Downtown Houston office occupancy also is hurting. Houston corporations, including energy companies headquartered downtown, have been downsizing -- some like Enron, radically.

Noting that he sees no signs of a turnaround, Sharman said he hopes there is one and, "rising water will flow to all of our ships, but I don't think it will."

Other hoteliers are optimistic.

"Yes, there is going to be some pain in the early years, but we're building for the future," said Don Henderson, vice president and managing director of the Hyatt Regency Houston.

The Hyatt Regency Houston believes in downtown's future to the tune of an ongoing $30 million renovation.

Downtown hotels come in all styles and sizes, and how they market themselves depends in part on where they are.

Location is very important, Keeling said.

Proximity to the light rail line is significant because it allows hotel guests to travel to interesting places -- like the Museum District, Medical Center and Reliant Stadium -- without having to take a taxi or rent a car and worry about expensive downtown parking, Keeling said, and they can enjoy downtown's nightlife near the rail.

With the advent of light rail, visitors may stay downtown even if their main purpose for travel does not involve being there, Keeling said.

Hotels such as the Hyatt Regency and DoubleTree, meanwhile, benefit from being in the corporate corridor, although current corporate demand for hotel space is a shadow of what it was a few years ago, Keeling said, but for the long term, they've got prime spots.

Being near the restaurant and club scene in downtown's Historic District is another plus, Keeling said.

Hotels such as the Hilton Americas, Four Seasons and Inn at the Ballpark have the advantage of being close to the convention center and Toyota Center.

The Sam Houston is near the ballpark and the Harris County Courthouse and other government offices, while the Lancaster is in the heart of the Theater District.

A big hotel like the Hyatt Regency will eventually benefit from the Hilton Americas' presence because of a spillover effect in which convention planners try to put delegates in as few as hotels as possible, Keeling said.

Smaller independent boutiques lure customers by developing and marketing a special image and attaching themselves to referral groups. The Hotel Icon, for example, will be a "Preferred Hotel" hotel and the Lancaster is a "Small Luxury Hotel."

In the near term, business may be rougher for independents because without a corporate flag, Keeling said, they lack brand-name identification and frequent traveler reward programs.

Until recently, the Lancaster had a monopoly on the boutique downtown hotel market, but it now faces competition from the Sam Houston, Magnolia, and soon the Hotel Icon and Inn at the Ballpark.

One reason so many hotels have been popping up is that the city introduced tax incentives about three years ago.

As an impetus to build, the new hotels receive rebates on 50 percent of hotel taxes normally paid to the city the first seven years of operation. In return, for the same seven years, the city can book many of the rooms for conventions bids.

Sharman maintains that tax incentives create an unfair playing field.

"What happens is hotels with lower tax structures have a competitive advantage and can buy business away from older hotels" that didn't receive incentives by offering lower rates.

Jordy Tollett, president of the Greater Houston Convention and Visitors Bureau, who pushed for tax incentives, said that Houston has been desperately short on downtown hotel rooms and incentives were needed.

Downtown is only now reclaiming the number of hotel rooms it had in 1983, when there were 5,200, he said. By 1987, after the oil bust, downtown lost almost 3,000 rooms.

By January, downtown will have 5,300 rooms. Keeling considers 6,000 a good number to compete for conventions.

Without the tax breaks, hoteliers would not have entered the downtown market, said Bill Franks, president of Spire Realty Group, owner and developer of the Sam Houston Hotel.

Downtown Houston is the main business district for the world's energy capital, Franks observed, and until recently "we had fewer hotel rooms than El Paso."

"I'm a capitalist," Franks said, "but there are times when we need to do things differently to accomplish the city's goals."

Franks noted that while temporarily receiving tax breaks, the new hotels are paying property taxes and providing jobs.

And, Franks and others argue, tax breaks help preserve local history. Great old buildings given up for dead now have piped-in Ella Fitzgerald music, bellhops and sparkling chandeliers, giving Houston a more charming urban core.

The Lancaster, Magnolia, Sam Houston, Courtyard by Marriott, Residence Inn by Marriott and Hotel Icon are housed in historic buildings.

By 2005, Houston will have at least two more downtown hotels in historic buildings: The 402-room Marriott Renaissance at the old Texaco Building and the 265-room Club Quarters in the Texas State Hotel.

The hope is that with more hotel rooms, conventioneers will follow, but Sharman is skeptical.

When convention promoters want to maximize attendance they choose Las Vegas, San Francisco or New Orleans -- not Houston, he said.

Washington and Boston, meanwhile, are reloading with new convention centers, Sharman said. The convention market is only getting more competitive.

But Tollett believes that the city of Atlanta can serve as a hopeful example to Houston. Like Houston, Atlanta has none of the attractions of San Francisco, Las Vegas or Orlando, yet it has become one of America's leading convention hosts.

Atlanta had to go through the same growing pains Houston is experiencing, Tollett said, building infrastructure and adding downtown rooms and convention space. In the 1970s, Atlanta ranked 20-something among convention hosts; today it is among the nation's top five.

Jeff Sachs, managing partner of the Strategic Advisory Group in Atlanta, a firm that does strategic planning for municipalities on tourism infrastructures, cited differences between the two cities.

Georgia is essentially a one-city state, he said, and the entire state is pushing Atlanta and continually marketing it. Its convention center is funded by a state authority. Atlanta's corporate community strongly supports downtown, he said.

Sachs does believe that Houston is greatly improving its chances of attracting conventions.

"The hotel package is the most important meeting planner selection criteria," he said. "You have changed your paradigm and significantly enhanced your ability to penetrate the convention market."

Houston still only has a third as many rooms downtown as Atlanta, and not as many big hotels, which appeal to conventioneers.

Tollett said he eventually would like to see another 1,200-room hotel built near the convention center.

The largest downtown hotel, the Hilton Americas, is owned by the city of Houston.

While Houston may not be Atlanta's equal it is certainly in a better position to compete with big regional players such as Dallas, which this year ranks sixth among the top trade show and convention hosts in the United States, according to Tradeshow Week.

Houston may not have the romantic allure of a San Francisco, but Keeling said it has plenty going for it, including a central location and low hotel and airfare costs.

Keeling believes Houston will be successful as a convention city for at least a decade. It will be "the new girl on the block," he said. "No one has been here. They've already been to New Orleans and San Diego -- Houston is a new destination."

But if Houston wants to be a convention draw for more than 10 years, it needs to do more, Keeling said. He suggested developing a strong restaurant and boutique shopping corridor downtown to complement existing amenities such as the Aquarium and sports facilities.

Until the downtown convention business kicks in and the local economy rebounds, hotels will court group business.

Hotels prefer the individual traveler because they can charge higher rates, Keeling said, and during the heydays of 2000 and 2001, they didn't bother with groups.

Last year, 53 percent of the guests staying in downtown hotels were individual business travelers, 38 percent were with a group, and 9 percent were here for leisure. This year, Keeling expects more group travelers because the hotels are going after them.

He notes that groups are not as location sensitive, but are very rate sensitive. In particular, members of "SMERFs" -- social, military, educational, religious and fraternal groups -- are rate-sensitive because they often pay their own way.

"Most hotels are looking for groups that fit their niche," said the Hyatt Regency's Henderson. The individual corporate business has, he said, "dwindled down to very little," forcing hotels to attract groups, but he cautioned, "a rate war won't help anybody."

Potential good news for downtown hotels is that light rail and the new arena could bolster weekend business.

The ballpark's arrival caused downtown occupancy to go up because of tourists staying over the weekends, Keeling said, "and light rail could have an even stronger impact."

What hoteliers most desire is a robust economy. When new hotels were being planned for downtown Houston a few years ago, the landscape was different, observed Mark Hellrung, general manager of the Four Seasons and president of the Houston Hotel and Motel Association.

The years 1998 through 2000 were the best in his hotel's 21-year history, but the collapse of Enron and troubles faced by other energy companies, as well as a weak economy and travel industry, has made life rough for downtown hotels, he said.

In 2000, downtown occupancy was almost 70 percent, Keeling said, while this year it's 54 percent. Next year it will be 52 percent.

"What we have is an aberration in demand," Keeling said. "Right now we have too many hotels, but in four years we may not have enough."

ROOMS WITH A LONG VIEW

Crowne Plaza, 1700 Smith.

Sam Houston, 1117 Prairie.

Best Western, 915 W. Dallas.

Lancaster, 701 Texas.

Inn at the Ballpark, 1520 Texas.

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