Aug. 10, 2008 - The hotel boom that began a couple of years ago in downtown Minneapolis is drawing to a close, and now the question is this: If you build it, will they still come?

There's evidence to suggest they won't -- at least not for a while and not in enough numbers to fill existing hotel rooms plus the 1,200 that are about to hang out "vacancy" signs.

This month alone, three new hotels will enter the downtown market. The Hotel Minneapolis at 4th Street and 2nd Avenue and an Aloft Hotel on Washington Avenue across the street from the Guthrie Theater already are up and running.

A W Hotel is scheduled to open this week in the renovated Foshay Tower. Early next year a Hilton Garden Inn will open near the Minneapolis Convention Center. Others joining the downtown market in the past couple of years include the Chambers, Westin Minneapolis and a Starwood Luxury Hotel in the Ivy condominium and hotel project near the convention center.

It's a significant round of development for downtown, which hadn't seen a new hotel since the Graves 601 opened across from Target Center in 2003. Hotels also are popping up in the suburbs, including a Hilton on the Bloomington strip, a Residence Inn by Marriott in Plymouth, a Sheraton in Woodbury and the soon-to-open Westin Galleria in Edina.

The projects were hatched when the Twin Cities and the rest of the country was in the midst of a post- 9/11 rebound in travel. But a downturn in airline travel, high gasoline prices and a generally weaker economy already have begun to hurt the hotel business, and recovery is not on the immediate horizon.

Two of the industry's largest companies, Marriott International and Starwood Hotels & Resorts Worldwide, recently reported sharply lower income and cut their earnings projections for the rest of this year.

The stock prices of each are about 40 percent lower than a year ago, reflecting the dim outlook.

"The increase in demand definitely is slowing down," said Kirby Payne, president of HVS/American Hospitality Management. The first signs of a slowdown began to surface late last year, as companies cut back on travel to save money or simply because they had less activity going on, Payne said.

Research by HVS has found that, after increasing sharply since 2003, valuations on hotel properties fell in 2007 and are expected to drop again this year.

Hotel occupancy in the Twin Cities is at its lowest level since 2004, according to figures compiled by Tennessee-based Smith Travel Research. The rising supply of rooms accounts for part of that, but it also could be because of a slowdown in travel.

Passenger traffic at Minneapolis-St. Paul International Airport is at its lowest level since 2004. Northwest Airlines, like many other carriers, has cut capacity and has projected further reductions for the rest of this year.

Atlanta-based PKF Hospitality Research recently said the expected 10 percent drop in airline seats could translate to a 3.9 percent reduction in lodging demand. That would be worse than the 3.3 percent decline in demand in 2001, the company said.

The market slowdown also is evident in revenue per available room, or revpar, a key performance metric. Revpar is still growing, but at a much slower rate than the past few years, according to Smith Travel Research. That's a surprising trend in the Twin Cities, where so many of the new hotels are higher-priced establishments.

And while declining occupancy and lower room revenues are occurring nationwide, the Twin Cities fare worse than average for the top 25 U.S. markets, Smith said.

One reason might be that the Twin Cities area doesn't draw large numbers of foreign tourists, who are finding travel to this country a bargain because of the strength of their currencies against the dollar. Foreign travelers are helping cities such as New York, Los Angeles and Las Vegas offset declines in domestic travel spending.

Local industry experts differ about whether new or old hotels will feel the brunt of the market slowdown. "There are a number of functionally obsolete hotels in this market," said Payne, of HVS. "You could see some of those close and possibly [be] torn down," he said.

That already has happened with the 46-year-old Downtown Ramada, which was recently torn down to make way for a mixed-use development that could include a new all-suites hotel.

But some newer establishments could be the ones to struggle if hotels are forced to cut rates to compete for a share of the smaller travel market, said Ben Graves, president of Graves Hotels Resorts. "Their cost basis is higher than an existing hotel," he said. The Graves 601 already has trimmed some rates, which he said start at $249 during the week.

New downtown hotels will probably have to charge around $200 a night to recoup their development costs, according to Ted Leines, a senior associate in the hospitality services group at the local office of Colliers Turley Martin Tucker. That's about $70 more than the average nightly rate in the past year.

Hotels also are looking for ways other than discounting rates to capture business. Radisson hotels this year began a promotion aimed at business travelers that includes a breakfast voucher for as much as $15 and 2,000 bonus points in its Gold Points rewards program.

The new Hotel Minneapolis hopes to lure guests by promoting an enhanced level of service, according to Bill Morrissey, whose St. Paul-based Morrissey Hospitality Co. will manage the 222-room hotel and its restaurant. Housekeepers will each clean 12 rooms a day, about four fewer than a normal workload, Morrissey said.

"At 16 rooms a day, you barely have time to do a proper job. We want them to have the time to make sure everything is done right," he said. "If they notice a baby bottle in an ice bucket, they can see to it that a refrigerator is delivered to the room. If they see a button on the floor, they can leave a note offering to have our staff sew it back on."

Recent lodging industry reports have noted that, even as hotel construction continues at a record pace, the number of canceled projects also is starting to climb. In the Twin Cities, plans for one hotel in the Warehouse District were recently scuttled, while two other hotels proposed for Uptown have been delayed indefinitely.

Even so, Leines says the local market still has room for more hotels that fill selective market niches, such as an extended-stay hotel. Certain parts of downtown, such as the area near the new Twins ballpark, also could support a new hotel, he said.

Morrissey says the downtown market is stable enough to survive the current down cycle.

"Americans are still going to travel. It's in our blood," he said. "Companies will send their people places. You can't just do business by text-messaging."

Susan Feyder --612-673-1723

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