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Minneapolis Looking at 1,300 New Hotel Rooms
 On Top of Current Inventory of 5,900

By Susan Feyder, Star Tribune, MinneapolisMcClatchy-Tribune Business News

July 16, 2006 - There's about to be a lot more room at the inn.

While work crews are still busy finishing the recent flurry of condo buildings, developers have moved on to the latest hot segment: hotels.

If all projects now envisioned for Minneapolis are built, 1,300 rooms could be added to the city's current 5,900 rooms, according to Greg Ortale, head of the Greater Minneapolis Convention and Visitors Association.

The construction includes new structures and conversion of venerable office buildings, including the Midland Bank Building and the Foshay Tower, the city's first skyscraper. Developers also have proposed hotels outside the downtown core, in the Warehouse District, Uptown and near the new Guthrie Theater.

Ortale is quick to emphasize that he's not convinced all the announced developments will become reality. "I don't get too excited until a shovel actually hits the ground," he said.

Even so, Ortale says enough hotel projects should get done to make this the most significant round of development in years.

The Twin Cities hotel boom is part of a nationwide trend. Almost 157,000 hotel rooms were under construction during the first half of this year, according to Tennessee-based Smith Travel Research. That's about two-thirds more than the nearly 97,000 rooms added in the same period in 2005.

While new hotels are popping up throughout the metro area, most of the notable projects are aimed at downtown Minneapolis, which hasn't seen a new hotel since 2003, when the Graves 601 (formerly Le Meridien) opened across the street from the Target Center.

Construction has begun on three downtown hotels. The Chambers Hotel, on 9th Street and Hennepin Avenue S., is set to open later this year. Scheduled for completion in 2007 are the Ivy Hotel + Residences near the Minneapolis Convention Center and a Westin in the former Farmers & Mechanics Bank building at 6th Street and Marquette Avenue S.

New York-based Starwood Hotels & Resorts, with brands including Westin and Sheraton, is the largest brand behind the hotel boom in the Twin Cities. For years, Starwood's local presence was limited to two Sheratons -- in Bloomington and Minnetonka -- and two budget Four Points by Sheraton, in northeast Minneapolis and one now closed in St. Paul's Midway. That changed late last year, with the opening of a Sheraton as part of the Midtown Exchange development on the site of the former Sears warehouse on Lake Street.

Besides the F&M Bank Building, Starwood plans to open Westin hotels in an expansion of Edina's Galleria and in the proposed Bridges of St. Paul mixed-use project. The hotel at the Ivy will be part of Starwood's Luxury Collection, its most elite level of service.

There's been no official word, but there's speculation that Starwood's upscale W brand -- aimed at younger, urban audiences -- will go into the renovated Foshay. Ralph Burnet, who will redevelop the building along with Ryan Companies, will say only that it's slated to be a Starwood product.

And a more moderately priced version of the W brand by Starwood called "aloft" will be part of the condo and hotel project near the new Guthrie being developed by Sherman Associates, according to Brian Gorecki, project manager.

A number of market forces have combined to encourage more hotel development.

The tourism market has bounced back from a weak economy and the trauma of 9/11. Occupancy and average daily room rates have risen locally and across the country, according to Smith Travel. The rebound has come in both leisure and business travel.

Jeffrey Wirth, owner of the Grand Hotel, sees the market for Class A office space as a leading indicator for the business travel market. The Class A market in downtown Minneapolis is the strongest since late 2001, with a vacancy rate of 14.3 percent, according to United Properties.

"The Class A office market brings in business travelers," Wirth said. "These are people who are coming to do business with downtown clients and want to have a downtown address while they're here."

Hotels also are benefiting from increased investor interest, which is helping finance more hotel projects. For the first half of this year, lodging real estate investment trusts (REITs) posted an average gain of 17 percent, compared with 13 percent return for REITs overall.

"Capital tends to follow market performance, and funding for hotel projects continues to be strong," said Mark Tobin, a Denver-based industry consultant. The bullish outlook for lodging also shows up in the double-digit gains this year for the major hotel company stocks.

Developers also have discovered that adding hotels to condominium developments can attract buyers interested in buildings with hotel amenities.

There's also been a growing demand among travelers for higher-end hotels, a segment targeted in varying degrees by the new hotels planned for downtown. Nationwide, occupancy and average daily room rates are rising at a faster rate for luxury hotels than for midpriced or economy lodging, according to a recent study by PricewaterhouseCoopers.

Paul Wischermann, whose Minneapolis-based firm is working with Starwood on several of its area developments, said the ceiling on room rates began to move up when the Graves 601 joined the Grand to become the city's primary upscale hotels. That opened the door for more upscale establishments, including those by Starwood, which has been underrepresented in this market, he said.

Burnet, who is developing the Chambers as well as the Foshay, agrees that Minneapolis is in a good position to attract hotel guests willing to pay for luxury.

"With the cultural attractions we've added at the Walker and the Minneapolis Institute of Arts and with the new Guthrie, we're becoming more of a destination," he said.

When Burnet and Ryan first announced plans to redevelop the Foshay last September, they considered remaking the building into a mixture of condo units and a hotel. They decided to convert the building solely to hotel use largely because they're limited in what they can do to update and redesign the office tower, which is on the National Register of Historic Places.

"We also began to think about its place in the city's history," said Burnet, a Minneapolis native who remembers boyhood trips to the Foshay, the city's tallest building from its completion in 1929 until the IDS Center was built in 1973. "It's a landmark, and as a hotel it still will be more of a public building."

The Foshay, the F&M and the Midland Bank all are older buildings that have had a hard time competing in the office market, where demand only recently has begun to strengthen. Besides converting them to potentially more-profitable uses, the renovations generally can be done for less than building from scratch.

Despite the flurry of hotel development, Ortale continues to believe the city needs a major convention hotel with about 1,200 rooms. The reason is that none of the newer hotels will have meeting rooms to accommodate large groups.

Ortale said the city, which is contending for the next Republican and Democratic national conventions, already has lost some convention business to cities such as Indianapolis, St. Louis and Denver. He said it's also facing tougher competition from Chicago, a convention heavyweight that has started pursuing some second-tier business to compensate for business it has lost to Las Vegas.

City officials have rejected the idea of public financing for a convention hotel, which Ortale estimates would cost about $300 million. He said the convention bureau continues to discuss the project with three local developers and is hopeful that some sort of public support, perhaps tax-increment financing, might be used to fund it.

Wirth, Wischermann and other hotel developers are opposed to the idea, saying a large, subsidized hotel could result in unfair competition and dump an excessive number of rooms on the market.

Minneapolis City Council Member Lisa Goodman, who represents the downtown area and heads the community development committee, agrees.

"If there's a need for this type of development, the private sector will step in," she said. "If there isn't, it would be stupid of government to do so."

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Copyright (c) 2006, Star Tribune, Minneapolis

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