THE REAL HOTEL DEAL

Dan Appell: March 28, 2013

Building a hotel next to the conference centre has many drawbacks. The possible benefits of the plan are insignificant relative to the city’s accommodation industry, while the industry will be exposed to a considerable risk. It is difficult to understand why a great deal of effort and money are being devoted to achieve such a small effect.

Atlific Communications, the group that manages the conference centre, points out that without a five star hotel next door the conference centre has difficulties overcoming objections to the lack of hotel space in the area. This is one of many objections to not taking advantage of Nanaimo’s venue. Overcoming this one objection might result in a few more bookings. Those who would still consider a new hotel a reasonable response to this objection ignore all the costs relative to possible returns.

As well, those proponents of the hotel are ignoring all the expert opinion from the hotel and financial industries. To make sense of the arrogance of their position is beyond my capabilities. There is very little short term benefit to this project and the long term effects will be crippling. There has to be a much more intelligent, and realistic approach to solving the problems associated with the conference centre.

My background is in city planning. As a planner all I do is argue for efficiency. This is my only socially redeeming function. Increased efficiency is the result of increased production and decreased consumption and waste. The net result of a more efficient city is a city that is easier to live in. The city’s industries become more competitive relative to other centres. It is easier to find a job and earn a living. It is easier to increase wealth, and the wealth that is created tends to stay in the city. It is easier (less expensive) to get from one place to another. The city’s population is generally healthier and happier. If all we do is increase efficiency within the city, by even a little bit, the benefits overtime are considerable and reach everyone. On the other hand, if inefficiency is maintained or created, the negative impact over time is likewise considerable, and unbalanced towards the disadvantaged.

The conference centre represents one of those many instances where the city has interfered with the development of the city in such a way as to make it less efficient. With only arrogance and delusion to guide them, city leaders made a whole series of blunders that made this city less capable. The effects of this conference centre on an annual basis are fairly small, but they accumulate. Failure to address this problem will make our city significantly less competitive, less capable of attracting investment capital, and less flexible in our response to the dynamics of a global economy. We will have to dig deeper into our pockets to pay for the upkeep of our city and we will be less capable of supporting amenities we all enjoy. In short, while the initial effect is small, the conference centre makes it increasingly harder for all of us to live in this city.

With respect, the conference centre’s problem with bookings is not that big a problem. We have an entirely different set of much bigger problems associated with that conference centre. From an urban planning perspective and the desire to make this city more efficient, we have four major problems associated with the conference centre: 1) It is a worthless building; 2) it is rapidly becoming purposeless, 3) it is in the wrong location; and it is costing us money. These are serious problems that need to be addressed sooner rather than later. These are real problems that a new hotel doesn’t solve. In fact, the new hotel will create a whole new series of inefficiencies that will acerbate the situation.

1) The building is worthless

This is a bitter pill to swallow. We spent about $75 million on a building that is worthless. I believe city hall is just waking up to this reality now. The proposed plan for the hotel involves giving it over to a private firm for a dollar. From a planning perspective, at least we get a dollar.

The problem is that building is on land that has some value. That land is being devalued only because the building that is on it is worthless. For a city planner the greatest crime is to reduce the value of land by adding development. The purpose of development is to add value to land. An ideal development policy would direct us to ensure all land is developed to its highest and best purpose. There is a circle in hell specifically for planners who allow development that takes away the value of land. The conference centre is on land that, at the very least, should be returning taxes to the city. This is land that can be much more productive than it is now. There is a lot of land in this city that, because of its location and typography, can’t be productive. This is not one of those locations. This is the corner of a major node in the centre of this city. This property ought to producing a significant amount of wealth for those who own it. The fact that we owners have sunk a huge amount of wealth into this location, and we are still sinking wealth into it, and, if things continue, we will sink even more wealth into this property with nothing to show for our investment but a worthless building, that is a huge problem.

Does this hotel deal solve that problem? No. The hotel deal makes sure that problem doesn’t get solved for the duration of the lease. Our grandchildren are going to be returned a building that is still worthless on property that has being effectively rendered unproductive.

2) The building has no purpose

If you remember there where three reasons for building this conference centre on this site: 1) It would spur development and an influx of capital into our city; 2) It would bring people into our downtown and allow our downtown businesses to revive; and 3) it would support the accommodation industry.

Reasons 1 and 2 haven’t panned out as promised. One would have to look very long and hard for very minute signs that the conference centre has contributed at all to our economic development. One could argue that the worldwide recession negated the contribution the conference centre could have made, but I would argue that conference centres are not supposed to do these things. Conference centres never contribute to economic development or revitalization in a significant way. They are not designed to do that. If you are building a conference centre to do those two things, then you a building a conference centre for the wrong reasons. A conference centre does do one thing only; it puts suits in hotel rooms. To expect a conference centre to do anything more than that is unrealistic, wishful thinking.

If a conference centre is not putting suits in hotel rooms then it has no purpose. This means that a conference centre is built to serve hotels. If you build a hotel to serve the conference centre then you have reversed the working model. Just by doing that you have introduced an unreasonable amount of inefficiency into your local accommodation industry. This inefficiency will make it much easier for other municipalities to compete for business that would otherwise want to come here.

The conference centre should be in the service of the hotels. The best working model for the relationship between the hotels and conference centres is to have a local hotel or a consortium of local hotels run the conference centre from their front desk. The hotel would notify the conference centre staff that they have booked something for such and such a date and the conference centre staff would get ready for it. The city wouldn’t be involved, and the industry wouldn’t have to restructure itself to suit the conference centre; although it may restructure to better serve its clients. This is the arrangement that works when it is employed everywhere else, but it is not the arrangement we have here.

We have a city hall that is far too involved. It is interfering with a productive and otherwise healthy, functioning economy in a way that weakens that economy.

Would a new hotel restore the purpose of the conference centre? No, it introduces a new hotel to a region that doesn’t require it, and it gives such favourable terms to the new development that the other hotels cannot compete. The accommodation industry is forced to restructure itself at a time when it is most vulnerable to devastating market forces. We end up with a purposeless building, a broken inefficient segment of our industrial base, and any wealth generated by the arrangement of conference centre and new hotel is sent out of the community.

3) The building is in the wrong location

For anybody who isn’t a developer or a planner this is a hard problem to understand. To get an understanding of the magnitude of this problem I remind people that in real estate development and development planning there has to be consideration given to only three critical issues: 1) location; 2) location; and 3) location. There is a lot at stake when it comes to real estate development. Get the location right, and all will be well; get it wrong and trouble and grief will sure to follow.

I brought up part the problem of location before. Unfortunately, there is quite a bit more to it then putting a worthless building on a site which has much greater potential.

Related to use. Public amenities such as meeting halls, museums, civic art galleries and libraries don’t mix well with retail. For many of you this sounds counterintuitive. The trend to put these amenities on Commercial Street as retail space becomes empty has been progressing since 1996 with the introduction of the library and the Diana Krall Plaza. Each time a new institution is added to the street we are promised that the classic “win-win.” The people who are attracted to the amenity will support the neighbouring businesses. People who visit the street to shop will find it convenient to take in a gallery show. Yet, retail continues to decline, opening up more space for public amenities. The public amenities are seldom pushed out by an increased demand for retail space. Even if there is an increased demand for retail the non-taxable amenities resist moving.

I was altered to this problem when I discovered that shopping mall managers will strongly resist allowing public amenities into their malls even when they have an abundance of unused space.

Public amenity on a retail street is counterproductive. Essentially, the amenity is a distraction, competing for the attention of someone shopping. Sometimes the shop associated with the amenity is competing directly with the store across the street devoted to making a profit. The museum shop will sell the same T-Shirt sold across the street in a store which pays taxes, pays rent, pays employees and struggles to make a profit. The civic art gallery manned by volunteers, free from paying rent or taxes can afford to stock a high volume of merchandise that the private gallery next door can’t handle. In the case of the conference centre, which has its own kitchen, it competes with the restaurants on the same street. Since public coffers subsidize every meal produced by the conference centre, and all the kitchen equipment was paid for by the city, the private run businesses don’t have a level playing field while they have to struggle to yearn enough money to pay the taxes that go to subsidizing the conference centre.

This is not a win-win situation. The retail on a retail street works best when the public amenities are nearby but not on their street. When the shopping street is an actual level playing field then the competition between store owners is healthy and invigorating. The competition compels the participants to create efficiencies which allows the whole street to better compete with other retail areas.

The proper location for public amenities is on land that can’t be taxed. The leftover bits of real estate that will never have a taxable use or a civic park. We could have put the conference centre in Maffeo-Sutton park, for example, and it would have been far enough away from the retail street to avoid the disruption the business on the street. Also, it it would have been close enough to all the hotels in the area to provide excellent service. A tunnel could have directly connected the conference centre to the hotel across the street. And, the walk from all the other downtown hotels is both very short and very attractive. That would have been a win-win. Right now we a situation where everybody loses.

One must also note that the conference centre, the museum, the library and the civic art gallery are all on land which could otherwise be taxed. Those taxes could make a significant contribution to the construction, maintenance and operations of those amenities. To be sure, the city acquired those lands because the street was in transition. Businesses moved and left the properties. Retail streets do transition. It’s a normal part of the cycle. The street was gentrifying. The city could have helped in that process and returned all those properties into productive, taxable entities, but instead it choose a different approach. That approach has left the street less efficient, less adaptable, less able to compete and less able to pay taxes.

One other consideration of location has to do with the intention of building a tourist industry. Tourism can be defined as all the legal methods of separating tourists from their money. From a planner’s perspective the easiest and most productive way to separate a tourist from their money is retail located in the downtown. This is derived from simple observation. In any town that has a tourist industry the downtown retail sector is outsized relative to the population. Victoria has about the same size population of Nanaimo yet the downtown retail sector is roughly 8 to 10 times larger than Nanaimo’s. Also, Victoria’s retail sector, on a square foot bases, is much more productive then Nanaimo’s. Nanaimo has a large retail sector, but it is all in suburban malls. The malls serve people living in Nanaimo, but they do not serve tourists. So as a means of adding wealth to the community, malls do a very poor job. If anyone was to look at downtown Nanaimo and compare it to downtown Victoria, or downtown Banff, or downtown Niagara Falls, then one would have to conclude that we have virtually no tourist industry. If Nanaimo wanted to develop a tourist industry, then the best place to start (the easiest place to start) would have been where the conference centre is. That site could have been developed to optimize retail for tourism. We choose a design that minimizes the retail, restricts its growth, and arbitrarily breaks-up the shopping space with gaps such as the road to Gordon street, large stairwells to the conference centre and a blank face to Terminal Avenue. The choice hasn’t worked out well for us. The conference centre is not as productive as a tourist oriented retail sector would be, and it doesn’t provided the needed stimulation to the surrounding businesses that a properly designed retail building would have.

4) The conference centre is costing us too much money

This is a very obvious problem, with a very obvious solution. There are two initial steps to be taken, then there is a third and fourth step which may not needed depending on the success of steps one and two.

The first step is to address the empty site that is designated for another hotel. Level it, plant grass and trees, and if anyone mentions building a hotel on that site again thank them by hitting them in the face with the flat side of a shovel.

The second step is to give the task of managing the conference centre to the hotels who would benefit from having it. Ask these hotels to form a working relationship that will allow them to manage and use the conference centre. They should be able to do this task in house, but if they want to hire an agency to help them, they are welcome to do so. The city just stops paying for the management of this centre. Also, the city backs away from the maintenance of the building. Costs associated with building upkeep are all borne by revenues derived from activities in the building.

If the local hotels don’t want this arrangement, then shut the building down.

This eliminates inefficiencies associated with the management of the conference centre, and it makes the accommodation industry more competitive relative to other urban centres.

However, the location and design of that conference centre does not make it easy to develop a vital tourist industry. Unless we are prepared to move our downtown retail to some other location, then the best (easiest) solution is to remove the conference centre and locate it somewhere else. Then rebuild on that site retail space designed to succeed. While steps one and two are fairly easy and inexpensive, steps three and four are costly. A new conference centre with parking structure would cost about $20 million and the new retail with residential above it would cost about $30 million. Still the combined costs are less than what we spent on the original conference centre and a lot less than the costs associated with the proposal city hall is making to get a hotel. Also this new arrangement would be considerably more productive, flexible, manageable and competitive then the arrangement city hall has been proposing.

I am just a planner. My only interest has to do with efficiencies. I know very little about the hotel/accommodation industry, conference centres and tourist industries but I do know enough about urban planning and design to know that the current situation is inefficient to the point of being unsustainable. If these inefficiencies where eliminated the accommodation and tourist sectors would have a chance to develop and make a much more significant contribution to our local and regional economy. If we continue to let city hall interfere with the management of the hotel sector, and diminish the size of the downtown retail sector we will lose the potential of these two valuable assets.

City hall can barely manage city hall, why we should trust these people to manage a very valuable resource run by skilled professionals is beyond my understanding. We should do what we can to put and end to this nonsensical situation. Stop the hotel deal now, and then we can start to repair the damage done by building the conference centre where we did.

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