Saturday, July 21, 2007

Conventionally bad thinking

Some bad ideas just won't die:

Downtown Pittsburgh can finally move ahead with plans for a headquarters hotel, with 400 to 500 rooms, adjacent to the David L. Lawrence Convention Center.

That's because the state Legislature this week included a $34 million subsidy for the $103 million project when it approved projects paid for from the slots development fund. The fund, based on 5 percent of taxes paid by slots casinos, also is helping to pay for a replacement for Mellon Arena. (From the Post-Gazette.)

I wrote this article for the Pittsburgh Business Times last year. I don't think much has changed since then:

Most of the time, Downtown hotels have only about a 60 percent occupancy rate, which to Strunk means that the city doesn't need any more hotels -- least of all a publicly subsidized one adjacent to the David L. Lawrence Convention Center. ...

Pittsburgh's real problem is that it is competing for conventioneers in an overcrowded market, said Heywood Sanders, a professor of public administration at the University of Texas at San Antonio. Sanders has studied the proliferation of convention centers nationwide and has closely followed the situation in Pittsburgh.

"What has gone on in Pittsburgh is what has gone on in lots of other cities, which are often faced with convention centers that don't perform as their proponents had hoped or promised, and so it is argued that what you need is an adjacent hotel," Sanders said.

As in Pittsburgh, officials in several other cities have failed to lure a private investor to take on the cost of building a convention center hotel, and so local governments either finance the hotels and assume ownership, or give subsidies to private developers.

Strunk sees that as evidence that the hotels won't be profitable, and he believes that even the most optimistic convention center projections will leave Pittsburgh with a glut of hotel space most of the year. ...

Sanders said convention center hotels in several cities, including Houston, St. Louis and Philadelphia, have failed to perform as expected.

"You're dealing with a pretty unforgiving market environment when it comes to running a hotel. If people aren't staying there, you can't pay the bills, and if you have to lower your rates to do it, then you put downward pressure on everyone else in the market," Sanders said.

We should never have expanded the convention center. Spending public funds to build a hotel there will only compound the error. How far would $34 million go toward shoring up public transportation in Pittsburgh? Fixing our sewers?

Nah, much better to spend it on a hotel that will sit empty half the year.

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Blogger Cope said...

They STILL talk about this? Yikes...

Between three and five years ago I was contacted by an investment banker whose company was considering underwriting bonds for the project. They had pretty much decided it was a bad deal but as part of their due diligence they decided to reach out to reporters who had covered the story and see if there was something they were missing.

The private sector, which has experience and economic incentive to make these things work, has always thought this was as bad of a deal as you could get. Why state and local government thinks they can do better is alarming yet sadly predictable.

3:23 PM

Blogger Jonathan Potts said...

I was tempted to make fun of your naivete for thinking that any hair-brained economic development scheme is ever truly rejected here, but I was surprised as well. A while back Dan Onorato said that the region couldn't afford to move forward with this project, but apparently now that casinos are going to provide enough money to lower taxes, build hockey arenas and cure cancer, we're flush.

I hope I don't sound too cynical.

8:28 AM

Blogger Bram Reichbaum said...

Hotels = Big steel beams. The newest widges. Big cranes. Many man-hours. Good.

2:09 PM


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