|by Steven E. Spickard, 1998
As communities consider the role of convention or conference centers
in their economic development plans, five basic points should be kept in
What if you build it, and they do not come? For one thing, the community is stuck with debt service that continues for 15 to 25 years. You may very well achieve negative economic impacts.
Starting with an assumption that a conference or convention center would be good for their community, many communities have made the mistake of hiring an architect before they know what type of facility they really need. Market research needs to be done before you start designing. You must know what your future facility users will want, and design to meet customer needs.
Expanding Existing Facilities
It is useful to break the decision-making down into two types of facilities.
The first type are existing facilities requiring expansion. In North America,
these are primarily convention centers because everyone who has a reasonable
convention destination already has at least some kind of facility in place.
Construction of these large centers boomed in the 1970s, but in the 1980s
convention and trade show groups kept growing as well. The associations
sponsoring large meeting-intensive events discovered that a trade show
component could be a money-maker for the association, and could underwrite
the meeting functions of their events. Therefore, needs
With expansions, it is necessary to be clear on what your community is trying to accomplish.
A key concept for expansion facilities is flexibility. For one thing, flexibility means that individual spaces should have the capability of being reconfigured to make smaller spaces and even to serve as swing space which can be an exhibit hall for one group, and meeting room space for the next.
Another aspect of flexibility is to create facilities which can accommodate multiple user groups simultaneously. For example, you need more than one "front door" to the facility. Every group wants to be made to feel that they are the only meeting in town.
Simultaneous use of the facility can also create greater economic impact.
With a single large convention/trade show event, a boom of four or five
days of activity is followed by four or five days of move in/move out,
during which there are no guests in hotels, a lack of patrons in restaurants,
underutilized transportation facilities, etc. In a facility that can accommodate
more than one group at a time, schedules tend to naturally become interleaved
so that one group is in the middle of their meeting while is another is
moving in or out. This more even flow of
The second class of facilities are those which are being developed from the ground up, where no meeting venue existed in the past. New facilities today tend to be smaller and typically are more properly thought of as conference centers (Again, the locations for convention centers already tend to have such a facility). With expansion of an existing facility the community knew what kind of destination they had, they were only fine-tuning a going concern. New development is harder, because the community has to guess whether they even have the potential for a destination draw.
To investigate the potential attraction power of your community, you need to understand the motivation of potential users for coming to your location:
conference centers. It is the money which is imported from outside the immediate region which has the power to stimulate true expansion of your local economy. One-day meetings tend not to draw people from great distances, and even when they do, those people have little opportunity to spend significant amounts of money in your community.
Even the very best meeting facility isn't enough to make meeting groups come to you. A number of other elements must be present in your community as well. Of great importance are hotels:
Other attractions besides the meeting facilities are also necessary to create interest in your community as a destination. For more sophisticated meeting groups, the city itself is generally the attraction. Cities such as San Francisco and New Orleans have become known as great places for consenting adults, with urbane cultures. Other groups may be attracted by commercial attractions. Disney theme parks have been great for the convention draw in Anaheim and Orlando. As meeting groups get more resort-oriented, attractions such as golf and other recreational facilities become more important.
Cost is obviously a major issue for every meeting planner, but it is
not so simple that the lowest-cost destination becomes the most attractive.
Each association analyzes the trade-off between cost and revenue potential.
As stated before, associations have discovered they have the greatest revenue
potential for themselves from the trade show component to their major meetings.
The demand to rent space in the exhibit hall is in turn driven by the expected
attendance of delegates (customers) at the meeting. Those cities known
to be attractive as fun
A more dramatic illustration of why the meeting facility itself is not sufficient to draw the business is provided by the results of Metropoll. Metropoll is a syndicated survey of several thousand meeting planners in North America that ERA has been conducting since the start of the 1980s. In the figure below, meeting executives have been asked to rate the importance of different criteria when selecting the site for their next convention. For each meeting planner, there will be an initial screening of a potential destination to see if the bare minimum convention facilities are available in the right proportions to house their event. Once that basic threshold is established, the evaluation hinges on factors in the order of importance as presented in the figure.
Costs of food and lodging are first, with 78% of meeting planners rating this as a very important consideration in site selection. Travel connections and costs are close behind in importance.
The inventory of hotel rooms is also very important, and is based on the number of rooms that can be blocked for convention business, not just on the gross number of hotel rooms in the area. Meeting planners are also looking for a large block in as few individual hotel properties as possible, with at least one hotel being sufficiently large to serve as the headquarters for their event. With around 50% of respondents reporting this factor as very important, attributes of the city are then considered. ERA has observed a trend of increasing concern over security and crime rates in site selection, but general friendliness and attractiveness of the destination is also important. Way down at 32% is the first time that the attractiveness of the convention center itself is considered.
The conclusion is clear that the facility alone will not create sufficient attraction for your community. You must have the whole package of tourism infrastructure to pursue this economic development strategy.
It is hard to be absolute, because there are real-world exceptions to virtually every rule; however, even in the rare cases where revenues cover operating costs in meeting facilities, they never cover debt service. For example, in San Francisco the Moscone Center brings in about $10 million per year in revenue. Operating expenses, on the other hand, are currently running at about $13 million per year. Thus, there is a "planned deficit" of about $3 million annually. On top of that, this year's debt service will be about $20 million, creating a structured deal that is designed to lose $23 million per year for the City of San Francisco.
The profits from a convention or conference complex come from renting
hotel sleeping rooms. What may not be observable in an integrated private
conference center is that there is an internal subsidy occurring between
the meeting facilities and the overnight accommodations. In a large-scale
public convention center in a community of hotels and other tourism-supported
businesses, a more complicated means of subsidization must be created.
This is typically accomplished by a tax on the hotel sleeping rooms, variously
referred to as the "bed tax", the
In their planning phases, many communities make statements such as, "We will include a convention center in our new project so it can subsidize our performing arts center (or new municipal auditorium, or other new civic facility)." Using a meeting facility to subsidize other public facilities is obviously a flawed concept.
The figure on the following page provides an illustration of the dynamics of this need for subsidizing in an expansion project as an example. The significant goal of the community is the economic impact, which is depicted by the large bar on the right side of the figure. This impact can be $200 million per year or more. A local government concerned about the well-being of its people is willing to suffer some seeming cost to get this dramatic economic benefit for its citizens. Looking at the bottom line for the public convention center, its financial performance is clearly a loser. Starting from zero, operating expenses and debt service drive the facility into a hole so deep that operating revenues cannot bring it back into the black.
On the other hand, no matter how good the intentions, the local government
must remain whole in order to survive over the long run. Some other forms
of public revenues must be used to make up the loss from the convention
facility. As can be seen in the figure, the hotel tax on the rooms the
incremental delegates pay is not enough. Even adding all the other taxes
the delegates generate, such as sales tax or payroll taxes, don't add up
to enough to meet the break-even line. In the case of the expansion being
analyzed here, which was true of San
It is important to note that an enlightened hotel community is willing to go along with this tax increase because they receive much of the incremental business in the economic impact column on the right of the figure. Furthermore, this incremental hotel business tends to be the additional money flowing in after fixed costs have been covered, and is what contributes disproportionately to the bottom-line profits for hotel properties.
From the figure before, one might look at the third bar and ask "why not operate the facility in such a way as to maximize facility revenues?" The way to do this is by booking consumer shows and events which cater to the local market. Promoters of these shows pay great rent, often in the form of a percentage of the gate. The problem with this strategy is that there is little or no expansion in the local economy created.
Community economic impact is maximized when delegates and exhibitors are attracted from out of town, bringing their money with them to spend as they stay for several days in your city. This new money flowing in then creates multiplier effects as the initial spending is circulated through businesses which serve as suppliers to the directly-affected hotels and convention service companies, and from there as it filters from the hands of employees into the grocery stores, service stations and other businesses that support the general population in your community.
Most major cities have realized this trade-off today, but the industry
has been evolving over the last couple of decades. On behalf of ERA, I
spent the 1980s shuttling between Los Angeles and San Francisco, advising
both communities on their tourism industries and meeting facilities. San
Francisco had bought into this systemic view of the convention industry
early on, and geared their marketing and booking policies to attract out-of-town
user groups. In contrast, Los Angeles pursued policies to maximize facility
revenues in service to the City Council. As a result, Los Angeles covered
operating costs and, in some years, even contributed slightly to debt service,
but did not enjoy nearly as large a boost to its city economy as did San
Francisco as a result of convention business. Los Angeles is still struggling
today, in spite of its $500 million investment in a facility expansion,
to change its
One other point on operations is that each location has its own unique seasonality in hotel occupancy. The point of attracting meeting groups is to fill hotel rooms in the slower periods, but not to displace the higher-paying, free and independent tourists and commercial travelers. Booking priorities, pricing and marketing should reflect these seasonal imperatives.
As a counterpoint to the bulk of this presentation, it should be noted that economic impact is not the only reason communities build public assembly facilities. In spite of the goals of CUED, economic development is not the only goal communities have. Legitimate public purposes can be served by having civic auditoriums and community meeting halls, and because there is that demand for day-use meetings in every community, even heavily-subsidized civic facilities have the potential to make some revenue by renting space for meetings.
The point, however, is to be honest in the community's objectives. It is a mistake to try to justify development of a civic center for your own residents' use by claiming it will have great economic impacts. Civic centers are public precisely because they serve social purposes, yet are not sufficiently profitable to be provided by the private sector.
If you are in this situation, you should stop feeling guilty about wanting facilities to expand your own quality of life. Community-serving facilities may not generate great economic benefits, but they are good for you anyway.