Sept. 01–In a market that’s still recovering from the recession, eight downtown hotels could open for business — adding 1,200 new guest rooms — before the city wraps up the $300-million-plus Convention Center expansion in 2016.
The developers might be making smart moves. City officials say the expansion will drive bigger and better events to San Antonio, drawing wealthier visitors who spend more and stay longer. That means more hotel nights and higher prices.
But the jury’s still out. It’s unclear what advantages, if any, the largest capital project in city history will deliver to businesses tied to tourism.
There are a couple of reasons for skepticism: the competition and history.
Cities competing against San Antonio for major conventions already have started or will break ground soon on similar projects.
And the previous multimillion-dollar renovations to the Convention Center, completed in 2001, didn’t deliver on promises that downtown would enjoy a surge in hotel activity, though industry experts blame national economic downturns beyond local control.
Still others question the need for new construction following a recent glut of new guest rooms that came online during the Great Recession.
“Business downtown is now finally doing good. Is it doing great? No,” said Chad Taylor, general manager of the Hotel Valencia on the River Walk. “Do we need more hotels? I’m going to say, adamantly, no.”
From 2003 to 2007, before the spate of new rooms came along, the Convention Center needed to book groups with at least 3,000 visitors for the Valencia to benefit from the event, Taylor explained. Currently, that number is closer to 6,000 visitors, and with the added supply expected to come online in the next year or two, the figure will grow.
One of the hotels that opened after 2007 is the 1,000-room Grand Hyatt, the Convention Center headquarters hotel.
Nevertheless, developers have started construction or plan to move forward on at least six confirmed hotels in the construction pipeline, with others considered atop Rivercenter mall and at the updated HemisFair Park. The first hotel is expected to open later this year.
Bruce Walker, president of Source Strategies Inc., a locally based hospitality-industry research firm, thinks the construction is warranted.
“Downtown can easily absorb about 1,500 new rooms in the coming three years,” he said in an email. His research found downtown occupancy in the first half of the year reached 70.5 percent, which he described as “about absolute capacity.””It doesn’t get much higher than that,” Walker added. “When the market gets to be around 70 (percent), it’s about time to start building.”
At the end of 2012, about 13,500 rooms were available downtown. Three projects already under construction in the area would add nearly 400 rooms by next year. That’s a nearly 3 percent increase, a boost that Walker said the downtown market can easily handle.
If each proposed hotel is built, the room count downtown would jump about 11 percent over three years.
Room availability hasn’t grown that quickly since between 2007 and 2010, when downtown struggled to absorb about 1,500 new rooms. During that period, the city as a whole took on more than 6,000 new rooms, and the recession helped oush down hotel profitability.
Out of the 50 largest metropolitan areas in the U.S., San Antonio had the highest percentage increase in supply during the recession, said Randy McCaslin, vice president of hospitality research firm PKF Consulting USA.
“The town is still trying to get back to normal,” he said.
According to Source Strategies, the downtown market saw revenue per available room — a key indicator of a hotel’s profitability — tumble from $98.48 in 2008 to $79.45 a year later. Revenue per available room only improved to $85.43 last year.
Although the large amount of new supply continues to hinder room rates, McCaslin predicted they could return to prerecession levels by 2015. Many of the planned hotels would come online by then, and McCaslin believed the market could eventually find room for them.
“How quickly they’ll get absorbed… is a matter of supply and demand,” he said.
Currently, demand for more hotel rooms doesn’t appear to be very strong.
In the second quarter of this year, which ended June 30, Source Strategies found that room nights sold downtown only reached 848,400, a mere 1.7 percent increase from the same period last year. Statewide, room nights sold between April and May rose by 3.6 percent compared to the second quarter of 2012.
“There’s some real yawning going on,” Walker said. “There’s no vibrancy. There’s not much life to downtown San Antonio right now.”
Developers aren’t waiting around to see how the market unfolds. They’re building hotels, and more are on the way.
But when talking about supply, referring to hotels is the wrong approach, said Nick Niak, president of Baywood Hotels, a local hotel development firm. Instead, hotel brands should be taken into consideration when looking at what the market can absorb.
“It’s all about brands. The market right now is ripe for certain brands,” said Niak. “All the hotels should not be put in one category.”
Building hotels with bigger room counts, he added, would cannibalize historic and larger hotels because they compete for the same clientele. Niak’s firm is bullish on downtown, but its decision to build there doesn’t hinge on the Convention Center expansion.
“Our biggest concern is the occupancy of the Convention Center,” he said. “That needs to go up. We have enough space.” Consistently booking the facility is more important for hotels with smaller room counts.
“Because if you expand and it’s empty, what difference does it make?”
Baywood has developed a handful of hotels downtown. It redeveloped the South Texas Building, 603 Navarro St., into the Home2 Suites by Hilton, and the Neisner building, 409 E. Houston St., into the TownePlace Suites.
The developer has already started construction of a Hampton Inn at 411 S. Flores, site of the historic Ace Mart Restaurant Supply building. The hotel will have about 105 rooms and is expected to open next year.
Baywood has its sights on another downtown location — at 408 E. Houston St., where it wants to build a Hilton Garden Inn. Niak didn’t disclose specifics about that project, but he said it could have as many as 120 rooms.
Projects other developers have in the works include the 146-room Hotel Pearl at the Pearl Brewery; the 131-room Wyndham Garden River North Hotel along the Museum Reach of the San Antonio River; and Comfort Suites on the western edge of downtown.
Also, in the Legislature’s regular session last spring, lawmakers passed a bill that set a 20-percent limit for hotel development at HemisFair Park. Developers have stressed that the expansion warrants a hotel there.
Real estate owner Ed Beck sees a different downtown project creating demand for hotels.
He’s betting that the Tobin Center for the Performing Arts will be a bigger draw than the Convention Center. He’s looking to develop a $50 million luxury hotel — possibly with a residential component — along the San Antonio River, about a block away from the former Municipal Auditorium. His rationale is that performers and visitors attending shows will want to stay at a high-end hotel.
“There will definitely be, either by me or by someone else, something really nice built there,” he said. “It will be a hotel that’s upper end because it’s needed. Look what you see around there now.”
Beck didn’t disclose a room count or firm construction timeline, but the retired U.S. Air Force colonel — who said he recently bought a hotel in Bulgaria — noted he’s aiming to open a hotel by the time the Tobin Center opens late next year.
Not every location along the river, however, is primed for a hotel.
Development firm NRP Group initially planned to build a hotel, along with residential and retail space, at the Blue Star II site in Southtown. But NRP decided against a hotel there because the location was too far north to draw people from the Eagle Ford Shale and too far south to cater to tourists, said Dan Markson, a vice president with the company.
Despite all the hotel-development talk, Markson isn’t convinced every project will come to fruition.
“They all won’t make it,” he said.
The most ambitious and controversial plan called for stacking a 500-room hotel and timeshare tower atop the historic Joske’s building at the corner of Alamo and Commerce streets.
The owner of the Joske’s building, Ashkenazy Acquisition Corp. of New York, recently scrapped that proposal, which opponents criticized for its sheer size and proximity to Alamo Plaza. But the developer behind the project — who recently stepped down — said in past interviews that the tower would help satisfy a boost in demand created from the newly expanded Convention Center.
Yet, citing similar projects in the past, experts cautioned hoteliers against banking their hopes on a boost in business from the Convention Center expansion.
The city last completed an expansion to the Convention Center in 2001, at a cost of $215 million. About seven years later, the city financed the construction of the neighboring Grand Hyatt with $208 million in bonds.
Neither project lured bigger convention business to San Antonio, said Heywood Sanders, who teaches public administration at the University of Texas at San Antonio and studies the public financing of development projects.
He declined an interview for this report but, in a recent opinion piece for the San Antonio Express-News, noted that convention attendance actually has declined since 1996.
“Indeed, while in 1996 San Antonio hosted 486,383 total convention attendees, in 2012, after all of the new hotels, the city garnered just 449,202 convention attendees,” Sanders wrote. “Despite the persistent forecasts and promises of more visitor and convention activity and more new jobs, the public investment in a visitor-oriented downtown has not been a truly productive one.”
He added, “The lesson after decades of the wrong approach is that we don’t need more hotels.”
However, McCaslin, Walker and city officials highlighted the poor timing of the Convention Center expansion in 2001 and the opening of the Grand Hyatt in 2008.
The terrorist attacks on Sept. 11, 2001 made most travelers hesitant to fly, and many businesses cancelled their conventions in distant locales. Similarly, the collapse of the financial industry and national recession that worsened in 2008 also depressed the convention industry — which only recently showed strong growth.
Casandra Matej, executive director of the Convention & Visitors Bureau, said she couldn’t predict what the next five years had in store. Still, she estimated the Convention Center expansion will bring up to 20 percent more convention business to San Antonio, though she declined to forecast specific attendance numbers.
The city’s priority, she added, should focus less on increasing attendance and more on attracting visitors who can spend more and stay longer.
“Would you rather have 2 million visitors spending $200 million, or 1 million visitors spending $300 million dollars?” said Michael Sawaya, head of the city’s Convention, Sports and Entertainment Facilities department.
He highlighted the types of conventions and trade shows that typically draw wealthier attendees, such as “desirable” trade groups. Unfortunately, they have outgrown the current capacity of the Convention Center, Sawaya said.
The American Society of Hematology and American Urological Association hosted events here in 2007 and 2011, respectively, but told the Convention & Visitors Bureau that they can no longer fit in the center’s current 426,600 square feet of exhibit space.
In an attempt to fix that, the city will spend $325 million expanding the exhibit space to 517,000 square feet. It’s the largest capital project in San Antonio’s history and could bump the city to ninth place among similar convention destinations in the U.S.
However, competitors such as Anaheim, Calif., Boston, Los Angeles, Miami Beach, Salt Lake City, San Diego and San Francisco have started planning or already broken ground on similar expansions to their convention centers — which didn’t surprise Matej.
“While we may have the largest ballroom for a while,” she said, “there’s going to be another developer somewhere in another city that will quickly develop that.”
