Perhaps It’s Check-Out Time on Hotel Incentives

By Dennis Boone

Tough times may be looming for Downtown hotels. So just how did that come to be?

Here’s a question for the civic do-gooders who for years called on Kansas City to build more and better hotel rooms Downtown, arguing that we needed expansion to attract convention business:

Now that the rooms are here—and with the prospect of more than 2,000 others coming on-line by 2022—which of the existing hotel properties is going to go under?

Follow-up question: What will it cost us, as a city, to deal with either a resulting vacant hulk of a building, or some drawn-on-a-cocktail-napkin bailout plan from City Hall? It’s a question we might want to start pondering now, especially with a mayoral race looming.

Some quick background: In the last half of 2018, the Downtown area saw five hotels, with more than 450 rooms combined, open up. Last fall, Drury Hotels withdrew a proposed project in Kansas City, saying the less-than-requested public incentives made the project financially untenable.

About that same time, the commercial realty pros at Jones Lang Lasalle issued a market report that projected fresh instability coming to the hotel market here, noting the high volume of new hotel rooms in KC. Then in April, the new head of the convention and visitors bureau committed the industry equivalent of heresy by suggesting it was time “to pause” on new construction and allow those new rooms to be absorbed into the marketplace.

The JLL caution on instability should be getting more attention. Industry standards suggest that for a lodging market to be considered healthy, the overall occupancy rate should exceed 70 percent. In 2017, enjoying a surge in interest from out-of-towners, Kansas City inched up to . . . 65.8 percent. That figure is expected to start falling soon—and with it, room rates and profit margins.

That’s not the worst of it.

Citing figures from Smith Travel Research, the JLL report compared Kansas City to 13 peer cities, including the usual suspects of Indianapolis, Nashville, Minneapolis, Pittsburgh, Cincinnati and Cleveland. With the exception of Baltimore, all were intermountain metros from Appalachia to the Rockies. And of the 13 assessed, precisely one posted a 2017 occupancy rate that crossed into the healthy-market category, barely, at 73.3 percent.

That one, by the way, was Denver. Gee, I wonder what they have there that none of the others has? And I wonder why any flatlander would try to compete with that?

Even more discouraging, despite the new inventory that came onto the market here in 2018, Kansas City was dead last among the 13 cities for projected inventory expansion (but fifth in active planning or future construction, thanks largely to the Loews project now under way).

To top things off, the St. Louis office of HVC, which deals in hospitality-venue valuations and market data, offers statistics showing that after the onset of the Great Recession in 2007, hotel revenues per available room in this market fell nearly 20 percent by recession’s end in 2009. In inflation-adjusted terms, those rates didn’t surpass the 2007 benchmark until 2015. During those eight years, a lot of hoteliers were struggling to make a go of things, even as a room-building boom was being unleashed across the Central Business District.

There’s a lesson to be drawn from all of those numbers, but it doesn’t seem to be penetrating some skulls in high places here. Given where we are now in room totals, given the current health of the existing market, and given the construction arms race taking place on a higher plane across the nation, Kansas City is never—repeat: never—going to build its way to room-availability dominance. It is delusional to think we can even approach parity with many peer cities.

More funding to make this region an increasingly attractive entertainment and vacation destination, as with JLL’s call to shore up VisitKC’s marketing muscle, isn’t necessarily a bad thing. Spending that money in the misguided expectation that we will somehow avoid “falling behind” a convention draw, is a bad thing.

The current condition of the Downtown lodging market, and the looming crisis ahead, happened because people who should know better refused to let markets do what markets do best—sort out winners and losers. Public incentives don’t do away with the winner-loser dynamic; they merely mask it, delay its consequences, and invite other parties to bear the costs.

There will still be losers when the bill for these incentives comes due. They will take the form of hotels that couldn’t  compete with newer properties operating at a financial advantage.

Something about that just doesn’t seem right.