Room at the inns? | Portland hoteliers worry about the 350 new rooms proposed for the city

Gustave Tillman Jr. is puzzled by developers' notions that the Portland area can sustain some 350 new hotel rooms. "I'd like to know what they know that I don't know," says Tillman, who is director of operations for the largest hotel in the state, downtown Portland's 239-room Holiday Inn by the Bay. (He also manages the 200-room Holiday Inn Portland West.)

Tillman says the occupancy rate at Holiday Inn by the Bay averaged "in the very low 60s" in 2004, which he says is typical for other hotels in the area. The Holiday Inn's occupancy rates for this year are averaging slightly lower than 2004, he says, due to harsh winter weather. "We're running average, and it's been flat," he says. "Any increase [in revenue] has been due to an increase in rates, which has been due to an increase in operating costs."

That situation hasn't dissuaded developers from proposing two new hotels in downtown Portland, and another possible project across the harbor in South Portland. The developers are uniformly optimistic on the market. "Hotels come in many shapes and sizes," developer Drew Swenson told Mainebiz last month. "Each competes in its own segment of the market. Our small hotel will have different clientele than the Holiday Inn, for example. We're not in direct competition with anyone."

Still, the growth of Portland's hotel supply is a departure from national trends in several regards: first, that it's happening at all; second, that it's happening here; third, that the projects are all relatively high-end, with residential components. "New hotel construction remains a fraction of what the U.S. experienced in the 1990s," says Mark Woodworth, a consultant with Atlanta-based PKF Hospitality Research.

Local hoteliers are particularly concerned by the lackluster performance of the Portland hospitality market over the past three-and-a-half years, which they say is unlikely to improve more than marginally without state or local intervention. They worry that there won't be enough business to go around if more hotels are built, especially during the lean winter months or in the case of another rainy summer. And while some are convinced the convention center complex recently proposed for downtown Portland is exactly the economic shot in the arm their industry needs, others see it as unwelcome competition.

But though they may disagree on the specifics, hoteliers concur that the Portland market can only support growth if the city and state are willing to foster an environment that will bring in more visitors. "I'm fine with new hotel development if we have a source of new demand, like the convention center. Then there's enough business for all of us," says Gerard Kiladjian, general manager of the Portland Harbor Hotel. "I don't oppose development ˆ— I think it's great ˆ— but we need a balance in development. Some that creates business for us, not just takes it away."

Building plans
With approximately 1,953 hotel rooms in the city proper, Portland already has the highest concentration of guest rooms in the state. Old Orchard Beach follows closely with 1,665 rooms, though many of those are seasonal. South Portland, with 1,272 rooms, is the only other municipality in the state with more than 1,000 rooms.

Seven hundred and fifty-five of Portland's hotel rooms are on the downtown peninsula. Of those, 217 were added within the past three years, with the opening of the 97-room Portland Harbor Hotel in 2002 and the 120-room Hilton Garden Inn Portland Downtown in 2003. The next-youngest downtown hotel is the 95-room Portland Regency, which opened its doors in 1986. (Off the peninsula, a new hotel hasn't been built in Portland since 1989.)

The larger of the two proposed downtown projects is a Westin hotel slated for the former site of Jordan's Meats, at the boundary between downtown and the city's rapidly developing East End waterfront. The hotel will have 150-plus rooms and 100 high-end condos, according to South Portland developers Liberty Companies. Construction is scheduled to start this fall, with completion slated for early 2007.

A stone's throw away, Swenson plans to follow a nearly identical construction timeline on his boutique hotel, which will bring 50 hotel rooms and 70 luxury condos to the city. The project will sit on the blocks bounded by India, Fore and Hancock streets; its accompanying 750-car parking garage will be located on the western portion of the Shipyard Brewery lot at Fore, Hancock and Middle streets.

And in South Portland, New York developer John Cacoulidis recently announced plans for a hotel project on his waterfront property off Madison Street, in a blighted section of town. The proposal, significantly scaled down from the version Cacoulidis offered in 2001, calls for a 150-room hotel plus 300 condominiums, a marina, and a retail complex. Cacoulidis and his design team, Portland-based Mitchell & Associates, have held one neighborhood meeting on the plan and are "responding to" that feedback, says architect John Mitchell. He says the team will hold another neighborhood meeting, hopefully within the next month, before proceeding with the planning process.

All this activity is somewhat unusual for a city the size of Portland, according to travel industry experts. Woodworth says most new construction is happening in sunbelt markets, which have recovered faster than average from the slump suffered by the hospitality industry since Sept. 11, 2001. Jan Freitag of Tennessee-based Smith Travel Research agrees that growth has been slow. "We only added one percent of new rooms to the national total in 2004," he says. "The average over time is between 2.5 and three percent per year."

Smith Travel predicts this "moderate increase in supply" to hold steady for the remainder of 2005 and the beginning of 2006.

Moreover, the majority of new projects have been limited-service hotels (no food and beverage service or meeting facilities) and mid-scale chain hotels like Marriott Courtyards, Hilton Garden Inns and Hampton Inns. Freitag says this trend is likely to continue. "The area where we expect to see supply growth in the future will be in limited-service sectors," he says, referring to the no-frills lodging category, "where hotels are comparatively cheaper to construct in a much faster time frame."

And while Woodworth confirms that there's been an increase in hotel/condo combinations during the past two years, both he and Freitag say this phenomenon has been limited to upscale projects in markets like New York City and Boston. "These projects are typically found in larger urban environments where new construction is often difficult," he says.

Terrence Guiney of Massachusetts-based Great Bays Holdings, who is partnering with Swenson on his East End hotel/condo hybrid, says the condominium portion of their project makes the package more attractive to financiers. "Condos, in a good market, are very easy to finance," he says, "because basically a lender will provide construction financing to each [unit], and as each condominium sells, cash changes hands, each buyer gets his or her own mortgage, and at the end of the sell-off you end up with a debt-free building. Hotels in the current market, as a real estate vehicle, are more difficult to finance."

Guiney, who is working on a similar project in Providence, R.I., says these hybrids are "more than a fad," and that they offer tangible benefits that will continue to make such mixed use appealing to developers. "The total project is better than the sum of its individual parts," he says. "The synergy between the two uses is very, very attractive to lenders, buyers and hotel guests as well, because the condos add to the upscale perception of the hotel. We've found that this formula works for us."

Rainy day worries
There's no universal benchmark for a profitable hotel occupancy rate, says Smith Travel's Freitag. Rather, each hotel must take into account its revenue per available room, which is in turn dependent on the hotel's average daily room rate. And the relationship between these figures and occupancy rates, the Holiday Inn's Tillman explains, is a fluid one. "You can have a pretty high [room] rate and a little lower occupancy and you're all right," he says. "Or a lower rate and a higher occupancy ˆ— you try to balance it out."

Despite the lack of a concrete benchmark, it's clear from comparing local and national averages that Portland has been slower than some markets to recover. According to data from Smith Travel and from PKF, Portland pulled ahead of national occupancy averages each year from 2002 through 2004 ˆ— in 2003, by as much as 2.2%. But compared to averages for the largest 50 hotel markets in the country, Portland lags. Though the gap was a mere 0.5% in 2002 and closed to 0.1% in 2003, the rainy 2004 season set Portland back to 2.8% below the top-50 average of 64.7%.

Tillman worries what effect another washed-out summer would have on the local market. "We're so weather dependent for the tourists," he says, "and we didn't have a good season last year because of the weather. And now with gas prices higher," he adds, "people might be more selective about coming up here, not knowing if the weather is going to be good."

Hoteliers in downtown Portland attribute the slow rebound of the market ˆ— and their concomitant hesitation to support new hotel construction in the area ˆ— to several factors beyond the sketchy weather. Those factors, while varied, can be distilled to a common theme: Visitors lack a compelling reason to choose Portland as a destination.

Bill Bola, general manager of the Eastland Park Hotel, feels this is especially true for business and convention travelers. "Maine is romanticized throughout the country," he says. "You have a lot of people, if they had a choice of going to Philadelphia, Atlanta, for a large meeting, they would jump at the chance to go to Maine instead. But we don't have the infrastructure right now to support that."

Though Bola declined to comment specifically on the convention center project recently proposed by local developer Joe Boulos (see "Standing on conventions," p. 21), he believes Portland would benefit greatly from such a facility. "We're not going to compete with New Orleans or Las Vegas," he says, "but should we not be able to compete on a tertiary level for some of these meetings or convention business? We should."

Kiladjian of the Portland Harbor Hotel also supports a convention center in Portland, and the Boulos project specifically. "I think if we get the convention center, then these [new] rooms will be supported," he says. "There will be enough business to support all of us nine months out of 12."

Kiladjian says a convention center would benefit hotels beyond the Portland area as well, through return visits by former conventioneers. "Not everyone realizes that a lot of people go to a destination on convention, on somebody else's dime," he says. "They realize how beautiful the place is, and come back on vacation with their families."

The Jordan Marsh example
But Tillman says a convention center will do nothing to help fill rooms during the off season, when Portland hotels are most in need of a boost in business. "People who want to come to Maine for conventions want to come when everybody else does," he says. "Not during the off season."

Furthermore, Tillman contends there's no demand for a convention center in Maine. "The convention hall [of the Boulos proposal] is the same size as mine ˆ— 11,000 sq. ft.," he says. "We have the largest property in state, and we can't fill our space."

But Boulos says the idea of limiting development based on current demand is "very parochial." "You have to be optimistic about future demand," he says. "Regressive thinking will put this state in a downward spiral." He says the growth of the Maine Mall area is a prime example of creating demand.

"Years ago, when the Maine Mall announced that Macy's was coming ˆ— it was Jordan Marsh then ˆ— people said that no other retailers would ever move out there because all our needs would be satisfied by Jordan Marsh," he says. "But the fact is, the Maine Mall is now the most sucessful retail complex in the state of Maine. Because it has more to offer, it attracts more businesses ˆ— they build on each other."

Tillman may differ with Kiladjian and Bola on the merits of a convention center, but all three men agree that the corporate travel market is crucial to the survival of local hotels during the winter, and even on weekdays during the summer. "Whether it's corporate or association business," Kiladjian says, "we all need that Sunday through Thursday."

In addition, Bola, Kiladjian and Tillman believe the state and the city could be doing more to promote tourism in the area. (See "Pitching Maine," cover.) In the end, though, if the Portland hotel market can't rouse a demand to meet its increased room supply over the next few years, the impact will likely be felt by hotels not just on the downtown peninsula, but beyond.

"I personally think outlying areas would suffer as much or more," says Bola. "People want to be near the Old Port, but if the rates are too high they may stay in South Portland on the weekends. If rates in the Old Port are reduced, though, the barrier to entry is lowered."

Bola says a reduction in rates at Old Port hotels would create a ripple effect much like what has happened in the Boston market during the past five years, where downtown hotels slashed their prices to gain a competitive edge and sucked away business from the northern and southern suburban markets. He predicts that South Portland would hang on to its strong corporate travel market, but "the leisure market, and some non-major brands, would be the ones taking a hit."