Feasibility Study of Expansion of Headquarters Hotel Capacity Franklin County Convention Facilities Authority Columbus, Ohio Submitted to: William C. Jennison Executive Director Franklin County Convention Facilities Authority 400 North High Street Columbus, OH 43215 (614) 645-3900 (614) 645-3906 FAX Prepared by: HVS Convention, Sports & Entertainment Facilities Consulting A Division of HVS International 4445 West Erie, Suite 1-A Chicago, IL 60610 (312) 587-9900 Phone (312) 587-9908 Fax Web Site: www.hvsinternational.com December 21, 2001 HVS International Table of Contents Table of Contents Transmittal Letter 1. Executive Summary 2. Description of the Land and Neighborhood 3. Area Economic Analysis 4. Downtown Hotel Market Analysis 5. Convention / Meeting Industry Trends 6. Convention Center Demand Analysis 7. Hotel Occupancy Projections 8. Statement of Assumptions and Limiting Conditions 9. Certification December 21, 2001 Mr. William C. Jennison Executive Director Franklin County Convention Facilities 400 North High Street Columbus, OH 43215 (614) 645-3900 (614) 645-3906 FAX 445 West Erie Re: Feasibility Study- Expansion of Suite 1-A Headquarters Hotel Capacity Chicago, IL 60610 Columbus, Ohio (312) 587-9900 fax (312) 587-9908 www.hvsinternational.com Dear Mr. Jennison: Pursuant to your request, we herewith submit our feasibility study pertaining to the above-captioned study. We have inspected the site and facilities and analyzed the hotel market conditions in the Columbus area. The conclusions reached are based upon our present knowledge of lodging conditions in the competitive market, as of the completion of our fieldwork and research on September 12, 2001. We hereby certify that we have no undisclosed interest in the property, and our employment and compensation are not contingent upon our New York findings. The feasibility study is subject to the comments made Denver throughout this report and to all assumptions and limiting conditions San Francisco set forth herein. Miami Orlando Chicago Vancouver Very sincerely yours, Toronto London New Delhi Singapore Mexico City São Paulo Buenos Aires HVS Convention, Sports & Entertainment Facilities Consulting HVS International Expansion of Headquarters Hotel Capacity– Columbus, OH Executive Summary 1-1 1. Executive Summary Assignment Overview The Franklin County Convention Facilities Authority (FCCFA) retained HVS International to analyze the feasibility of developing additional full-service convention hotel capacity in downtown Columbus, in the immediate vicinity of the Greater Columbus Convention Center (GCCC). To this end, HVS International personnel worked to understand the downtown lodging market, identify its key demand generators, uncover trends in occupancy and average rate, and determine the implications of the development of a new convention headquarters hotel; also, to understand the relationship between the broader downtown Columbus economic condition and the downtown lodging market. We also performed a detailed analysis of the broader convention center competitive market, in order to frame the GCCC’s operating characteristics in a larger context. The convention center market analysis was intended to understand the likely direction of the center’s usage, under a variety of scenarios. We have developed projections for the subject hotel market and the convention center assuming that no new hotel development action is taken, as well as under the assumption that an additional 500 rooms of headquarters hotel capacity enter the market as of January 1, 2005. New Capacity Issues HVS International was specifically directed to analyze the site located on a city block bounded by High Street to the east, Convention Center Drive to the south, Front Street to the west, and Vine Street to the north. The site is located across High Street from the GCCC. Development on this site would presume that a whole new hotel was constructed, as opposed to the possible expansion of the existing Hyatt Regency affiliate that currently operates as the GCCC’s primary headquarters hotel. (It is our understanding that an expansion of the Hyatt Regency with up to 350 new rooms has been considered in the recent past.) In our analysis, we have developed occupancy rate projections for an additional 500-room headquarters hotel. This phase of the assignment does not include the financial projections that would be necessary to determine whether the construction of a new hotel or an expansion of the Hyatt HVS International Expansion of Headquarters Hotel Capacity– Columbus, OH Executive Summary 1-2 Regency would be more optimal. Although a Hyatt expansion would likely be easier to finance and complete and less expensive to operate, the construction of a whole new hotel with an additional first-class brand name would heighten the lodging market’s profile and improve the marketability of the convention center. Site Conclusions Key conclusions pertaining to the subject site, as identified above, are noted below. • The site was found to have sufficient size and physical utility, with strong connections to key downtown demand generators. • Based on our research, no alternative site offers superior or comparable advantages. • Our research indicated that no significant zoning restrictions would be placed on the development in terms of either height or size. • City officials supervising new construction on the site would be more concerned with design and architectural issues. • City officials reported that an elevated, pedestrian walkway would likely be prohibited. Neighborhood Key conclusions pertaining to neighborhood influences are noted below. Analysis • Downtown Columbus consists of two increasingly distinct sub- sectors: 1) a vibrant northern sector, and 2) a stagnant southern sector. • The downturn in the downtown neighborhood’s quality becomes most apparent in the vicinity of Capitol Square. • Hotels in the north outperform those to the south by a significant margin. • Two southern sector hotels are currently struggling to maintain viable occupancy rates: the Adam’s Mark and Westin Great Southern. The Hyatt Capitol Square has also been adversely affected by the decline in the health of Columbus’s urban core. • Development of a new headquarters hotel risks further isolating southern sector hotels, and increases risk of further financial distress for these owners. • Potential outcomes for the “at risk” hotels (the Adam’s Mark and the Westin Great Southern) are a pivotal question in determining the HVS International Expansion of Headquarters Hotel Capacity– Columbus, OH Executive Summary 1-3 prospects for the proposed headquarters hotel. We have identified three likely outcomes, without identifying which is most likely or preferable: 1) a revival of the surrounding neighborhood resulting in renewed occupancy and firm rental rates at the existing hotels; 2) continued operation as a hotel use, but with a lower-rated brand and market orientation; and 3) an adaptation of the real estate to a residential or other alternate use. Area Economic Key conclusions pertaining to the area economic analysis are noted below. Analysis • The Columbus area enjoys the benefits of a truly diverse economic base. Franklin County and the broader Columbus area have experienced consistent economic growth in past decades. • Columbus is an important center of research and development, the home of a large and dynamic state university, and an important regional center for commerce, health care, and retail services. • In 2001, the Columbus economy sent out mixed signals. Employment levels were up, but real estate vacancy rates were also increasing. • Downtown office market trends are similar to those affecting the downtown hotel market: weakness in urban core, strength to the north. Downtown Hotel Key conclusions pertaining to the hotel market analysis are identified as Lodging Market follows. Analysis • Of the eleven identified hotels, only five (containing 1,381 rooms) would likely be perceived as being within “walking distance” of the convention center. • The year-to-date downturn in the competitive market is attributed to the loss of commercial demand previously generated by The Limited, Bank One, and Borden. In addition, the terrorist attacks of September 11th exacerbated weakening economic conditions. • When balanced, the downtown Columbus lodging market should generate occupancy rates of 65% to 70%. The market is expected to finish 2001 at approximately 60% occupancy. • The downtown lodging market’s average rate growth was weak between 1996 and 2000 when compared to other hotel markets throughout the nation. HVS International Expansion of Headquarters Hotel Capacity– Columbus, OH Executive Summary 1-4 • In last four years, 472 rooms with only 5,600 additional square feet of meeting space have entered the market. • The Adam’s Mark is the only full-service hotel to open since 1989, and its brand identification is limited. Thus, recent inventory increases do little to raise the city’s profile. Hotel Occupancy Assuming no new hotel is constructed Projections • 2002 is expected to be a down year for convention demand. Recovery anticipated in meeting and group segment, thereafter. • Marketwide occupancy should decline in 2002, but recover gradually and return to balanced conditions in 2006 and 2007. • In these projections, we make no specific assumptions regarding outcomes for hotels such as the Westin and the Adam’s Mark, which are currently struggling to maintain viable occupancy rates. These hotels’ revival would appear to be contingent