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Big Increase In Supply of Hotel Rooms Helps Propel Hotel Occupancy
 in the Twin Cities to the Lowest Level since 2003
By Susan Feyder, Star Tribune, MinneapolisMcClatchy-Tribune Regional News

Jan. 5, 2008 - Last summer, the developers of the Hilton Garden Inn -- now under construction near the Minneapolis Convention Center -- regretted having to miss the four-day boom in hotel business from the Republican National Convention. Now, Mark Globus, whose Global One Commercial is developing the 210-room hotel, thinks his firm may have dodged a bullet.

"Originally we were in a real hurry to get it completed," Globus said. "We missed the convention, but it turns out that we also missed some really slow months."

The hotel is expected to be completed in March. "We're relatively optimistic that, by the time we're ready to open, things will have started picking up," Globus said.

The lodging industry has turned in a dismal performance here and elsewhere in the past few months. Hotel occupancy in the Twin Cities is at the lowest level since 2003, according to figures through the end of November from Tennessee-based Smith Travel Research.

The drop in occupancy is blamed on an increased supply of hotel rooms in the Twin Cities and reductions in travel. Passenger traffic at Minneapolis-St. Paul International Airport has been falling since 2004 and is at a four-year low.

Even the GOP convention couldn't fill all the rooms. Area hotels had a 2.9 percent drop in occupancy in September, compared with 2007. The occupancy declines moved into double-digit territory in October and November, when the economy went into a tailspin and put a lid on business and leisure travel.

Industry experts don't share Globus' view that a recovery will come anytime soon. Smith Travel and Atlanta-based PKF Hospitality Research both recently forecast a nationwide drop in hotel business that will continue until 2010. The gloomy prognosis includes the Twin Cities.

Occupancy and revenue per available room, a key performance benchmark, are expected to fall in 2009 at hotels here.

In what may be a sign of tough times ahead, PKF last month launched a consulting business to help struggling hotel owners throughout the country restructure their finances and cope with declining revenue.

Two of the industry's largest companies, Marriott International and Starwood Hotels & Resorts Worldwide, recently projected lower profits in 2009. The stocks of both declined by more than 40 percent last year, reflecting the dim outlook.

The recent decline in gasoline prices isn't likely to have a major impact in reviving the hotel business, according to Kirby Payne, president of HVS/American Hospitality Management.

"The big thing right now is the number of people who have lost jobs and the uncertainty a lot of other people are feeling about whether they'll lose theirs. People might not totally give up travel, but they'll take shorter vacations," Payne said. Businesses faced with lower profits also will cut back on travel, he added.

Payne and other industry experts said luxury hotels are likely to feel the brunt of the downturn, as leisure and business travelers try to economize. Smith Travel's figures indicate that that already has happened. In November, luxury hotels nationwide had sharper declines in occupancy and revenue per room than did midscale or economy establishments.

A preponderance of budget-conscious travelers could create problems for the newest crop of Twin Cities hotels, nearly half of which positioned themselves for upscale customers.

Globus said his hotel should benefit by being a midprice alternative to the new, mostly higher-end competitors in downtown Minneapolis. He declined to specify room rates, but a check of the hotel's website, which has begun to accept reservations, quotes a "best available" nightly rate of $159 for a two-bed room on a weekday in March. That's about $40 to $200 less than the rate for the same night on the websites of downtown's other new hotels. (The quoted rates don't include discounts, such as those for corporate account holders.)

New downtown hotels would likely have to charge at least $200 a night to recoup their development costs, according to Ted Leines, a senior associate in the hospitality services group at the Twin Cities office of Colliers Turley Martin Tucker. "I'm getting the sense they're struggling to do that," Leines said.

Payne said that hotels generally would rather sacrifice some occupancy than engage in heavy price-cutting. The Starwood Luxury Collection Hotel Ivy condominium and hotel complex has trimmed rates slightly since opening in February, according to Jeff Laux, a partner in the development. But Laux said the hotel has taken other steps to offset the slow travel market, including packages that combine a hotel stay with use of its 17,000-square-foot spa. The goal is to attract in-town as well as out-of-town guests, he said.

Ralph Burnet, owner of the Chambers Hotel at S. 9th Street and Hennepin Avenue and the W Hotel in the Foshay Tower, said occupancy has been about 69 percent at each hotel, eclipsing the Twin Cities' average rate of 63.6 percent. He said both hotels made some modest cuts in payroll in November by trimming positions and hours.

Restaurant business at the hotels has been strong, Burnet said, although holiday party bookings at the Chambers were down slightly from 2007.

At the Westin Edina Galleria, occupancy has increased an average of 5 percent a month since the hotel opened in August, according to Patrick Clemons, director of sales and marketing. The 225-room hotel caters mainly to business travelers, but also has drawn a healthy amount of special-events business from area community organizations, he said.

Clemons, Burnet and Laux hope their hotels can ride out a downturn in upscale travel, because new establishments such as theirs tend to generate some buzz.

"You always get a little bit of a push by being new," Clemons said. "It normally lasts about a year."

Susan Feyder --612-673-1723


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