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:
â€¢ 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.
â€¢ 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.
â€¢ 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.
â€¢ 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.
â€¢ 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.