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Hosting Mostly Debt

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Hosting Mostly Debt

Cities have borrowed billions to build convention facilities, an industry with a cloudy future. Summer 2021
Cities
Economy, finance, and budgets

For nearly three decades, municipal officials have touted the convention business as a surefire way to generate economic growth. The outcome: a vast building binge. Cities, counties, and states have invested billions of borrowed dollars—which they must repay with tax receipts—in expensive convention centers and meeting places. The resulting glut of space has made it hard for these facilities to support themselves, even in good times.

The pandemic, however, has plunged the industry into the worst of times. Convention centers face insolvency, as local officials ponder whether to bail them out with tax dollars or borrow even more money to keep them afloat. There’s a real danger that the industry will never recover.

Even before Covid-19, the rationale for convention centers rested on optimistic projections. As the convention business expanded during the 1980s and as several notable annual gatherings, including the then-biannual Consumer Electronics Show, grew to staggering size, a few early players such as Chicago and Las Vegas saw record growth and filled thousands of local hotel rooms. They invested heavily in expansion, which they promised that they could pay off with proceeds from new convention business. McCormick Place in Chicago, one of the industry’s signature facilities, spent $1 billion to add more than 800,000 square feet in the 1990s, while Boston shelled out $240 million to upgrade and expand its convention center. In part, the cities were responding to competition from new facilities like New York’s $486 million Jacob Javits Center, built in the 1980s.

Local officials used low-cost municipal bonds to raise funds to build or renovate centers (partly because private industry was wary of investing in these megaprojects). The cities then promised bond-buyers that taxes on hotel rooms and other spending by visitors would pay off the debt. Projects arose at a dizzying pace. From the mid-1990s through 2010, cities added 30 million square feet of convention space, an increase of 75 percent.

The only problem: the growth of the convention business didn’t keep pace. In fact, it declined. From 2000 through 2010, the number of attendees at conventions fell by nearly a third, from 126 million to 86 million.

Most new projects failed to meet projections. McCormick had hoped to attract more mega shows; instead, the facility found itself empty 45 percent of the time. After Boston’s big investment, hotel occupancy in the city barely rose.

When Minneapolis, which expanded its center in 2002, failed to hit its projections for new business, the operation’s head, Jeff Johnson, lamented, “Other cities expanded right along with us.” Despite clear signs that overbuilding had produced a “buyers’ market,” according to one industry expert, other cities kept on building, attributing unsatisfactory results to not building big enough or to having insufficient amenities. Just years after Boston finished its center upgrade, the city decided to build a new convention facility for $800 million. It opened in 2004; five years later, it had generated only half the hotel business that consultants had predicted.

Losses mounted, and subsidies swelled. Washington, D.C.’s new convention center, projected to need an operating subsidy of $5.6 million, lost $12 million in 2004. On top of debt-service costs of $32 million and other expenses, the total bill for operating the center came to some $60 million annually, according to a report on the industry by Heywood Sanders, a professor at the University of Texas at San Antonio. Orange County, Florida, invested $2.5 billion to build and expand the mammoth Orlando convention center, but the site generated annual deficits of $10 million and was occupied just half the time before Covid.

The pandemic lockdowns of 2020–21 brought the convention business nearly to a standstill. Revenues have dried up, leaving behind billions in debt. To make do, municipalities are dipping into their own tax revenues or pushing debt on these centers further into the future. The board that runs the Lexington, Kentucky, Rupp Arena and convention center had to refinance $275 million in debt last September to avoid defaulting on $8 million in bond payments. The threat of default also forced the Wisconsin Center, a downtown Milwaukee convention facility, to restructure its debt last June; it cut interest payments to $8 million from $25 million this year at the cost of incurring new debt.

Meantime, McCormick Place in Chicago must rely on $15 million drawn from state sales-tax revenues to meet its obligations this year. The authority that runs the center had already hit its borrowing limit for the year but expects to borrow more next year to deal with future obligations amid the travel slowdown. San Antonio had to pay $13.4 million to satisfy the obligations of a convention-center hotel whose bonds it had backed. Similarly, Orange County in Florida had to dip into its own reserves to send $5 million to its convention-center accounts, after hotel taxes used to support the center dipped by 89 percent last summer. The county owes $890 million that it raised through municipal-bond offerings on the center, amounting to annual debt payments of $76 million.

Convention-center advocates themselves are typically bullish. A few places have even used the pandemic to justify further expansion, arguing that they’ll need new investment to remain competitive. New York has spent $1.5 billion on a Javits expansion that will be finished this summer.

Members of the meetings and convention industry aren’t so sure that a robust rebound is coming. In a survey last summer, 62 percent of event managers said that the future of their industry lay in hybrid events—that is, events combining a live meeting or convention with virtual options. “We now know the benefits of attending online events, as much as we are very clear about the limitations,” the industry’s EventManagerBlog wrote last year. “To think that virtual attendance won’t continue after the crisis ends is naive at best.”

Convention facilities that were operating at high capacity before Covid might be able to survive such a shift. But many centers were only busy half the time. Even a modest shift toward hybrid meetings will increase their deficits. That’s not a minor concern, considering that municipalities and tourism authorities already owe billions of dollars in debt and that they’re adding new obligations on top of all that red ink.

“Convention Centers are a stagnant and dying industry that require endless taxes,” the former mayor of Seattle wrote shortly after the lockdowns began last year. “The pandemic exposed its fragility.”

Now the bill is coming due.

Photo: benkrut/iStock

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