Making Rooms
An expanded Convention Center needs extra lodging. How much is just right?

Philadelphia Inquirer, June 15, 2008
By Suzette Parmley

The expansion of the Convention Center has unleashed a gold rush of hoteliers, with three facilities under construction and as many as five more in the planning stages.

This is fairly predictable. Convention centers need nearby hotels, and expanded convention centers need more nearby hotels. As a result, Center City is a white-hot market at the moment.

But just how many hotels, or more important, how many hotel rooms is the right number?

There is no easy equation, experts say, and no easy answer.

How about 2,500 additional rooms?

"Twenty-five hundred is roughly the number we've been using," said Pete Tyson, vice president for PKF Consulting, a Center City firm that tracks the hospitality industry. "It produces a supply-and-demand scenario that remains in balance."

How about 4,000 rooms?

"Four thousand would be too many, because the existing hotels would be concerned about their occupancy levels," said Jack Ferguson, executive vice president of the Philadelphia Convention & Visitors Bureau, which is in charge of booking conventions for the newly expanded center.

Ferguson said 2,500 new rooms would generate 1,750 jobs and prevent an inventory glut that would pull down occupancy rates among existing hotels.

He said an ideal rate would be 72 percent occupancy on an annual basis.

"Anytime . . . a major city is running 70-plus occupancy," he said, "it is definitely a place for investors to look at to operate a hotel and put their flag."

Hospitality experts say there is no mathematical equation to figure out the perfect number of hotel rooms that major events such as a national political convention, the Olympics, or an expanded downtown convention center require.

Supply-and-demand ultimately decides, they say. Still, hoteliers, convention planners and tourism officials spend an extraordinary amount of time and resources trying to make the best guess.

Three hotels are currently under construction - Kimpton's Hotel Palomar at 117 S. 17th St.; a Sheraton Four Points at 1201 Race St.; and Le Meridien, in the old YMCA building on 1421 Arch St. The trio of hotels will add 532 rooms by late 2009.

At least five additional hotels are being proposed: a 265-room W Hotel at 12th and Arch; a complex for two hotels with 800 to 1,000 rooms combined at Broad and Race Streets; a 260-room Intercontinental Hotel at 1601 Vine St.; and an 800-to-1,000-room hotel at the Girard Estate, directly across from the 12th and Market Street entranceway of the Convention Center.

While 2,500 additional rooms is the ideal number to some, it is equally important that they be carefully distributed.

"The tricky thing is that within that 2,500 rooms, there is at least one convention-oriented hotel of 500-plus rooms to augment the Convention Center-area supply," Tyson said. "In other words, if you added 10 hotels with 250 rooms each, that might not enable you to attract some of the larger conventions that are assumed in that 2,500-total-room number and the roughly 300,000 additional convention and room nights estimated by the bureau."

That's where the jumbo-size hotel that Ed Grose, executive director of the Greater Philadelphia Hotel Association, has been pushing for would fit it.

"There needs to be a big-box hotel with somewhere around 600 rooms that is close to the Convention Center - a convention-type hotel," he said. "When meeting planners come in, they don't want their convention attendees to be too spread out over many hotels. They want to keep them to fewer hotels.

"Once you start spreading out attendees, your transportation costs increase," he said.

Stephen Mullin, senior vice president at Econsult, an economic consulting firm here, said unforeseen events were factors in determining the right number.

"I'm not a big believer there were too many [rooms] for the 2000 GOP Convention," said Mullin. "Demand took a hit after 9/11.

"What's the right number now? It's very hard to say," he said. "Demand is sort of increasing at a steady pace with the new Convention Center expansion, and it will bump up even more.

"But you don't add hotel rooms at the rate of three per month," he said. "They come on in big chunks."

The expanded Convention Center is expected to debut Jan. 5, 2011.

The trio of hotels under construction will add 532 rooms by late 2009.

The five hotels being proposed could add from 2,100 to 2,500 rooms by 2013.

If every proposed hotel comes online, they will add about 3,000 rooms.

Far too many hotels were built in preparation for the 2000 Republican National Convention, when Philadelphia was the host city. Between 1997-2000, close to 4,400 rooms were added, thanks in part to generous tax incentives and grants from the city, according to the Philadelphia Convention & Visitors Bureau.

In the minds of some, it was a costly mistake.

"We definitely want to be careful we don't overbuild like we did for the Republication Convention of 2000," said hotel association chief Grose.

"Then shortly after, you had a perfect storm: 9/11, the economy went south, and you had all these extra rooms, and people were traveling less," he said. "As a result, all hotels suffered."

According to Smith Travel Research, which tracks the U.S. hospitality industry, hotel occupancy in the city is 62.2 percent year-to-date, down 4.2 percent from the same period last year. But the average daily rate per room has gone up 6.7 percent.

Based on those two figures, revenue per available room - a metric that is closely watched by investors - has increased 2.2 percent year-to-date, which means that, although Center City hotels are getting filled less, each occupied room is generating more revenue.

Holden Lim, of the San Francisco office of Cushman & Wakefield Sonnenblick Goldman, who brokered a $50 million loan for Kimpton Hotels & Restaurants last month to finance its hotel, said the company reviewed the revenue numbers and "saw an opportunity."

"It's really a new demand-generator that will induce business into the city that otherwise would not have come," Lim said of the expanded Convention Center. "Hopefully, it will be a long-term inducement, as opposed to one that leaves."

Kimpton is redeveloping the old American Institute of Architects building at 17th and Sansom Streets into Hotel Palomar and is moving forward on the project.

Others aren't as lucky.

Tyson said the big concern now was that a combination of high construction costs, worries over the short-term health of the travel industry, and the tightening of credit markets could delay a number of the projects.