Business Review's Top 5: Indicators that Ann Arbor may not be ready to support a conference center
Ann Arbor may be able to make use of a new conference center: But can a proposal to build one on top of the Library Lot really be in the city's best interest?
A consultant hired by the Downtown Development Authority said Wednesday that one of two proposals submitted to the city for the site is "valid and supportable from a market demand standpoint."
I find that hard to believe, given the cost ($54 million) and components: 150 hotel rooms, retail space, restaurant space, 12 condos and a location that isn't highly visible.
One aspect that's been removed from the plan is municipal bonding to fund $8 million of the conference center - so presumably, we're getting a proposal that calls for 100 percent private investment.
But the proposal still carries a lot of risk for the city. Here are my top 5 indicators that keep me skeptical that this plan can be good for Ann Arbor:
• Building prices. Thanks to the global banking crisis, plenty of people are finding opportunities to buy commercial real estate. The kicker: The values, while not "pennies on the dollar" locally are still fractions of what someone paid to build many of these buildings. Construction costs still outpace market value of existing buildings. And as long as that's true, new construction will always lag behind other forms of real estate: it comes to market with more debt (if financing is even available) and less flexibility for an owner to absorb a downturn.
• Hotel occupancy. While getting better, we're still working our way up from dramatic lows in 2009, when occupancy averaged 58.9 percent. It appears to be crawling above 60 percent, but that still means that, on average, about 1,600 of the county's 4,000 rooms are going unused. Nationally, hotel construction is falling off even as the sector is becoming more attractive to investors - at least the all-cash buyers, according to a report from Jones Lang LaSalle.
• Tax revenue. While city officials may be tempted to count the increase in tax revenue from building a new facility, another local tax shows some softness in the hotel sector. In Washtenaw County, 58 establishments pay the county's accommodation tax. As of October, 15 of those were delinquent. Several are bed & breakfasts, but since 2009, the county has had to seek court judgments to collect this tax from at least two Ann Arbor hotels. The lodging industry hasn't recovered enough, across the board, to cover all of its bills.
• Retail trends. South State Street is hot; but can we really say that downtown can absorb more retail space that's off the high-traffic corridors? Conference center traffic alone won't support a retailer; neither will a restaurant or two nearby, if they're the only destinations on the block. The "B" locations that we've already built are still waiting for tenants: Ashley Terrace, 4Eleven Lofts. New retail space in a building like this is likely to go unused or rent at a deep discount, positioning it as a liability for the project.
• Retail trends, part 2: How well are Ann Arbor's retailers doing right now? How many will last through 2010? The answers to those questions vary widely. But from what I'm hearing, we can expect many more vacancies on Main Street and even South State this year. Retailers wanting a prime location in Ann Arbor will probably find one. That leaves less of a market for secondary locations - and lower rental rates, which won't support new construction (see above).
I'm all for enhancing the draw of Ann Arbor to a wider audience, boosting traffic for existing businesses. But doing it with a $54 million building on top of a city-funded parking structure that doesn't meet market demand could be devastating for more than just the developers.
Comments
a2baggagehandler
Thu, Dec 2, 2010 : 6:20 p.m.
I think you're on to something JW.
JW
Thu, Dec 2, 2010 : 1:31 p.m.
Has anyone considered the possibility also that this is being pushed by the politicians, not because of their concern about helping the tax payers, but because a project of this size cannot but help local developers and contractors? They would get a quick pay off while the tax payers far into the future will have to pay for it. Seems like there might be a lot of this going on in Ann Arbor.
Leslie Morris
Thu, Dec 2, 2010 : 12:15 p.m.
I was appalled at the poor quality of the consultant's report, considering what the city paid for it. Many commenters have made excellent points about the foolishness of such an investment in this city at this time. One point that has not been raised so far: The proposal indicates that the city is to be the owner of the conference center. The reason for this is that all conference centers require an operating subsidy; conference rentals do not pay the full cost of a year-round permanent center. The private proposers do not want to pick up this cost. That is why they repeatedly refer to a "public-private partnership". City taxpayers are being asked to provide a special benefit to this private hotel, condominium and retail building, which would have direct interior access to the city-owned conference center. What do owners and operators of other hotels think of this "special partnership"?
rusty shackelford
Thu, Dec 2, 2010 : 10:39 a.m.
Your retail analysis seems way off base. This is right next to the library, bus station and post office--three places a lot of people congregate, and it will be close to easy parking. I'm not sure this is the ideal use either, but it seems a fairly good one for this large a space that would otherwise just sit empty. And if the space has to be discounted, that can only help the town by providing for a more diverse array of retailers (i.e., it can provide space for retailers selling non-luxury goods at prices more reasonable than what's currently offered at many downtown stores). I also agree that using county-wide vacancy rates is misleading.
Ben Connor Barrie
Thu, Dec 2, 2010 : 9:53 a.m.
Yes, more objective transparent analysis please. As an Ann Arbor native who has recently returned to the city after years away, it seems like there is a lot more rhetoric on both sides of the Library Lot debate. Sifting through the history of the issue to draw meaningful conclusions of my own feels like a daunting task.
Veracity
Thu, Dec 2, 2010 : 9:49 a.m.
Kudos to Paula Gardner for providing a realistic analysis of the financial risks facing a new downtown hotel/conference center. I provide the following additional analysis of the Valiant Partners proposal. Assume that Valiant Partners will borrow $54 million dollars for 20 years at an interest rate of 6% yearly. The yearly interest cost will be $3,240,000. In addition Valiant Partners must have a sinking fund to pay off the entire loan after 20 years which will cost $2,700,000 on average annually. The combined annual cost of the loan totals $5,940,000. In order to meet financing costs, Valiant Partners will have to charge $104.32 per night for each of the 156 hotel rooms and only if every room is booked daily throughout the year. To be more realistic, with present hotel occupancy rates of 60%, Valiant Partners will have to charge $173.86 per night in order to cover financing costs. But, actually, Valiant Partners must charge even more in order to cover costs of hotel staff salaries, utility costs, insurance costs, and hotel upkeep and maintenance costs. Valiant Partners will most likely have to charge MORE THAN $200 per night for each room just to meet total costs. In order to pay taxes to the City and make a profit, the developers will have to charge considerably more. Will hotel room rates over $200 per night be competitive in the Ann Arbor hotel market? Will conferences want to book rooms at such high costs? Of course this analysis does not include monetary contribution from use of the conference center. I have no idea how many functions will book the conference center each year. The best scenario will probably have the conference center leased for 3 or 4 days weekly. If each conference were booked for $10,000 and that money used to reduce the cost of hotel room rental, each night's rental cost would only be reduced by $8.78 per night. Assuming that my assumptions and calculations are correct, the Valiant Partners proposed hotel/conference center will not be commercially viable. As the analysis applies to any similar hotel/conference center concept, City Council should terminate any consideration for such construction over the library parking lot or anywhere else in Ann Arbor.
Brian Bundesen
Thu, Dec 2, 2010 : 9:14 a.m.
I would really be interested in seeing an overall objective analysis of the conference industry. I cannot imagine any economic indicators that would show that the industry as a whole will come back to the levels they once were. In this age of rapidly advancing capabilities with web conferencing, I cannot imagine business conferences being successful unless they are in more desirable locations (warm weather, big city, etc.)
Charlie S
Thu, Dec 2, 2010 : 8:28 a.m.
What about the three most important rules in real estate: location, location, location? There are few downtown hotel options for visitors and their occupancy rate is far higher than the figure quoted here. Pulling statistics at the county level helps to make the author's point, but does not represent the actual market. Sure, some Briarwood area hotels may suffer if a downtown facility is built, but I think that is probably a cost the city is willing to endure. As a frequent business traveler, I am almost certain that occupancy of this proposed hotel would more than justify the cost.
limmy
Thu, Dec 2, 2010 : 8:11 a.m.
I don't like the idea of the city being involved in real estate at all. I am remembering the old Y building that sat empty for years while the city paid to house former residents in motels. The city just does not handle business well. I am totally against this whole idea.
Elaine F. Owsley
Thu, Dec 2, 2010 : 7:46 a.m.
Sixth indicator: It's an ugly, out of sinc building that looks so unlike anything around it, it outdoes the ugly addition to the City Hall. Misplaced and mistaken idea.
a2grateful
Thu, Dec 2, 2010 : 6:45 a.m.
Jan: "As someone who worked at the A2 Inn in the 80's, I can say that having a viable downtown hotel was a boon to the whole city." Really? And what was the fate of the grand Ann Arbor Inn. Bankruptcy... Abandonment... Tax auction... Boon? No, boondoggle! And given the world, national, local, and hotel-specific economies, this is one of the stupidest projects ever conceived by the City!
Jan
Thu, Dec 2, 2010 : 4:52 a.m.
Paula. LXIX, M Hartwell, Like your thoughts. I believe that the idea deserves merit, but based on the schematic and location ( and ugly design) that is needs a lot more thought and discussion. While Hotels may have issues with occupancy right now, it will be 2-3 years or more before anything would be ready to go. As someone who worked at the A2 Inn in the 80's, I can say that having a viable downtown hotel was a boon to the whole city. Tons of activity and world travelers viewing our town for the first time is very valuable to A2. Staying on Boardwalk doesn't let anyone know what A2 is all about. Keep the conversation lively...
Michael Hartwell
Wed, Dec 1, 2010 : 10:27 p.m.
Remember Tally Hall. DDA, Parking structure, retail space: White Elephant.
Bob Martel
Wed, Dec 1, 2010 : 8:25 p.m.
Paula, Thanks for being a skeptic, I share your concern about this project. It's a big risk for the City with an ill defined upside.
glacialerratic
Wed, Dec 1, 2010 : 8:24 p.m.
Here's a link to the consultant's report, via a link in the Ann Arbor Chronicle: http://annarborchronicle.com/wp-content/uploads/2010/11/LibLotConsRFQ.pdf
Kent Jocque
Wed, Dec 1, 2010 : 8:20 p.m.
I found a link to the consultant's report in an earlier annarbor.com article. It can be found at http://localannarbor.files.wordpress.com/2010/11/library-lot-report-final-23nov10.pdf
LXIX
Wed, Dec 1, 2010 : 8:18 p.m.
Well... See if the DDA ever wants your reporters for their consulting needs. City Council seems well-intentioned in trying to re-establish the high era of Germanic design that once raised Ann Arbor onto the arcitectural map. However, as the piece rightly eludes, Berlin planning is so out of sync with the real-world of Ann Arborites these days that we should all be a little concerned. Suggestions. > Pretend you own the downtown and must live there - how would YOU want it? Big Times Square? Fancy Rodeo Drive? Happy Disney Land? Cozy Chelsea? > Take some tourist pictures showing off A2. Got Zaragon and City Hall? Michigan Theatre and Blimpy Burger? The lofts or Burton Tower? > Buy some hidden windy farms, poke some geo-holes, plaster the rooftops with solar stuff and sell people cleaner City Power to pay some bills. > Require the UM to pay its fair share of costs in lieu of lost taxes. > Rather than sending more capital out to investors, bring more capital in. (Usually by selling something besides the only thing that makes this town map-able - its historic property).
yohan
Wed, Dec 1, 2010 : 8:13 p.m.
If the conference center / hotel doesn't make economic sense then why is Heiftje and his minions still pushing for it? I think for the answer you have to look at who really runs this company town. Yep, the big, all powerful UM wants a hotel / conference center but doesn't want it to be a university building. Why?
Kent Jocque
Wed, Dec 1, 2010 : 8:11 p.m.
Paula, I'd like to read the consultant's report before forming an opinion. How did you go about getting a copy? -Kent