Vacancy

An ignored study raises doubt about Dallas' proposed role as hotelier

If you build it, they'll be pissed.

Dallas hotel owners, already struggling with what one hotel manager describes as the lowest occupancy rates in the city's history, are none too happy with a proposal being forwarded by some local government officials to use taxpayer money to build a 1,200-room upscale hotel onto the city's convention center.

Hotel owners and investors and a couple of taxpayer watchdog groups say a study they commissioned that shows how the proposed hotel would hurt them was ignored by the media and sloughed off by city officials. The reason? It's not because the watchdogs paid for the $28,000 study; it's because the study says the hotel proposal is a lousy idea that investors with money to lose wouldn't touch in this economy or in this market, the study's sponsors claim.

If we build it, will anyone come?
Mark Graham
If we build it, will anyone come?

"No private developer would undertake to develop this hotel project, as it is not a sound investment," the study by private consultants Source Strategies Inc. of San Antonio says in part.

The company uses public records to determine how many rooms of what type exist in a given market and how many are being rented. The company has been around since the 1980s and produces dozens of similar studies for the public and for the private sector. Its findings are used by banks as a basis for loans, and studies are not infrequently cited in large newspapers, its owners say.

Peggy Venable, the Citizens for a Sound Economy's Texas director, says her group opposes the hotel idea on the principle that government should not compete with private industry. But, she says, it is important to note that no investor from the private hotel industry has seized upon the idea of building the convention center hotel in Dallas because it's not a good idea right now.

"We oppose it from a public policy perspective. It's not the appropriate role of government. We think cities should not be in the hotel business...and if they use taxpayer dollars to do it, we would sure hope that it was going to be financially feasible," she says. "We believe in the Yellow Pages concept. If you can open the Yellow Pages and it's done in the private sector, then why should our tax dollars be used to do it. Moreover, why should our tax dollars be used to do it if it's going to compete with private industry?"

Local government representatives such as Dallas Mayor Laura Miller and her husband, state Representative Steve Wolens, are among those who are pushing legislation that would enable Dallas to build the hotel mostly with hotel occupancy taxes, the same way that Houston built a soon-to-open hotel near their convention center. The Dallas hotel, which would be managed by a private company, would draw convention business to the city, proponents say. Other details, such as the proposed financing arrangements, were not available, and neither was Wolens nor Miller.

Michael H. Anderson, who owns some property where the hotel could be built and who represents other owners of potential hotel property, says the watchdog groups' study concerned itself more with raw data than it did analysis. Besides that, the watchdog groups' study was delivered near the end of a long process and offered incongruous comparisons between hotel types.

The Source Strategies "definition of convention center hotels, of area hotels versus headquarters, attached, adjacent hotels is the tragic flaw in my opinion of the analysis," Anderson says.

The study says that the hotel in itself will not create demand for hotel rooms and that it will be bad for the already depressed Dallas hotel market. Todd Walker, vice president of Source Strategies, said that "barring a massive turnaround in the Dallas-area economy," the convention center hotel would start draining from existing hotels immediately after it opened, "but there is nothing like that on the horizon," he says.

"Dallas had a huge increase in supply and a commensurate decrease in demand," he says. "They are suffering."

Among other things, the study says that even if occupancy rates edged up between now and when a convention center hotel opened, the large number of new rooms would flood the market and reverse a positive trend.

"The negative pressure put on market performance by the addition of 1,200 unnecessary rooms in 2006 short-circuits the lodging recovery projected for the downtown market," the study says.

The study estimated that the lost profit to existing upscale hotels would be $175 million during the first five years after the hotel opened. The study did not say the negative impact of new hotel rooms is permanent but that it exists now and probably will for the next eight to 10 years. The study's authors also wrote that their review showed that no Texas hotel like the one proposed ever amounted to an attraction.

"Not one of the 16 new convention-size 'headquarters' hotels that opened in Texas since 1981 has ever generated a significant demand increase for hotel rooms in any market," the study said in part. "...Unfortunately, some municipalities falsely believe that a major new hotel is a solution for the lack of visitor growth and economic health of the downtown area."

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