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After a glut of new hotels in KC, a realization: There’s now more supply than demand

New hotels have sprouted across the Kansas City skyline, suggesting a city on the rise as a destination for tourists and conventioneers. But new data obtained by The Star shows there are more hotel rooms in the market than there are guests paying to stay in them.

And there is concern about filling the ever-increasing supply of hotel rooms as the new 800-room Loews convention hotel downtown prepares for a 2020 opening.

Visit KC, an agency that promotes convention and tourism business in the Kansas City area, commissioned a study of Kansas City’s hotel market by real estate firm Jones Lang LaSalle. It revealed signs that supply is outpacing demand:

Occupancy rates in Kansas City’s hotels, the percentage of rooms that guests book, is below the threshold for what’s considered a healthy hotel market.

Those occupancy rates, which started dropping last year after peaking in 2017, are forecast to continue declining if Kansas City can’t drum up new demand for hotel rooms.

As more hotels open in the next couple of years, Kansas City will need to book 483,938 more reservations by 2020 just to keep its current occupancy rate steady.

“What I’m saying is we have done a great job of developing supply,” said Visit KC chief executive Jason Fulvi at a meeting last week of the Tax Increment Financing Commission of Kansas City. “At this point, it might be wise to take a pause, let demand catch up and re-evaluate.”

New hotel construction started in earnest in 2016 and shows few signs of slowing down. For years, Kansas City policymakers sought a new convention hotel as a means to lure new convention business to a city that had steadily watched large gatherings like the Future Farmers of America and Walmart decamp for other cities.

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To correct for the oversupply, Visit KC wants to ramp up its efforts in pursuing new convention business.

Kansas City has had some success in recent years. In 2016, there were 279 conventions in Kansas City, which grew to 290 in 2018, according to Visit KC’s annual report.

Those figures are still below the 328 conventions that came to Kansas City in 2000, an era of downtown that preceded Sprint Center and the Power & Light District and offered what few would say were attractive amenities to out-of-town visitors.

“All the evidence from those numbers is now, over close to two decades, Visit KC has not succeeded in moving the needle in the city’s convention business one iota,” said Heywood Sanders, a professor at the University of Texas-San Antonio who researches the convention and hotel industries.

The softening of Kansas City’s hotel industry has ripple effects.

City officials expect to receive less hotel sales tax revenue for the next fiscal year. One consequence: The Neighborhood Tourist Development Fund, a city agency that awards grants to nonprofits holding cultural events, is suspending its quarterly grants for the second half of the upcoming fiscal year.

Groups like mental health boards and libraries that subsidize new hotels through tax abatement programs are now taken aback that Visit KC is calling for more resources to correct the oversupply of hotel rooms.

“It just seemed like, wow, we spend resources we didn’t need to (on new hotels) and now we’re being told we need to spend more resources as a community,” said Bruce Eddy, executive director of the Jackson County Mental Health Fund, who attended Fulvi’s presentation. “That seemed kind of misplaced to me.”

R. Crosby Kemper III, the Kansas City Public Library director and co-founder of libertarian think tank Show-Me Institute, said he was skeptical of the city’s pursuit of new convention business.

“It’s extraordinary that Visit KC is asking for more money to do more selling to do something that obviously isn’t working,” Kemper said.

Visit KC’s annual budget is about $11 million, approximately 40% of which is spent on convention sales.

Eddy and Kemper are among several representatives of taxing jurisdictions on the TIF Commission, which evaluates project proposals and makes recommendations to the Kansas City Council on projects that are eligible for TIF, a powerful tax incentive program.

Organizations like libraries and school districts rely on property taxes for their budgets. Incentives like TIF and other tax abatement programs send some or all of the new property taxes that would otherwise go to taxing jurisdictions from an approved real estate project to pay for certain developer costs.

New hotels in Kansas City are often, but not always, given incentives and tax breaks. For example, the 800-room Loews convention hotel received a slew of tax breaks and direct subsidies from the city. Across the street, a Courtyard by Marriott hotel was built without any incentives; the firm that developed it didn’t want any tax breaks.

Fulvi, in an interview, said he was looking to raise more money for Visit KC through “nontraditional ways,” noting that the organization has a department that seeks sponsorships. Visit KC is primarily funded through Kansas City’s hotel occupancy tax and a business license fee.

Fulvi said the decision to build up Kansas City’s hotel inventory “was a smart thing to do.”

“I would much rather be having this conversation than saying, oh my gosh, we’re running at a very low occupancy and we can’t get anyone to develop a new hotel to take this to another level,” Fulvi, who has been Visit KC’s chief executive for seven months, told The Star.

Indeed, there are signs that Kansas City’s hotel market has strengthened over the last several years. In 2007, Kansas City’s occupancy rate was 60.2%. The average daily rate for a hotel room was $96. The market peaked in 2017 when the occupancy rate reached 67.2% and the average daily rate grew to $116.64.

But in the last three years, Kansas City added more than 800 new hotel rooms. In the next two years, 1,635 new rooms are expected to come on to the market, according to the Jones Lang LaSalle study.

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In one instance, a hotel chain dropped plans for a new Drury Inn hotel at the site of the former Kansas City Public Schools building at 1211 McGee St.

In a letter to the Economic Development Corp. of Kansas City, a lawyer representing Drury Southwest Inc. said the project could not obtain enough incentives to be feasible in a hotel market that was getting crowded.

“Drury believes that the project is financially risky, particularly given the projected doubling of downtown hotel room inventory over the next twenty-four months,” the lawyer wrote.

Fulvi said the added inventory has caused groups and conventions that would otherwise overlook Kansas City to now consider hosting a meeting here.

“There is a lot of positive buzz about Kansas City because of the investments that were made and groups that typically would not have looked at us are now looking at us,” Fulvi said.

Fulvi noted that Kansas City will host the National Society of Black Engineers in 2023 and Destination Imagination, a student education competition that involves 17,000 attendees, moved its global event to Kansas City starting this year.

The Visit KC presentation said convention business accounts for 13 percent of Kansas City’s hotel market share, but it was one segment for which the organization projected future growth.

Sanders, the Texas researcher, questioned the extent to which Kansas City could realize gains in the convention business. Sanders’ research generally holds that cities are in a continuous arms race to build up convention facilities and hotels in a chase for limited convention business.

Sanders said cities like Chicago, Atlanta and New Orleans and others have built or are planning to build newer and larger convention hotels than Kansas City’s project.

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“What Kansas City is doing from a competitive standpoint, everyone else is already doing more,” Sanders said.

Alex Tisch, executive for Loews Hotels that will operate Kansas City’s new convention hotel when it opens next year, said he expects his project to help generate incremental new demand for convention business because it’s the type of hotel that Kansas City previously lacked.

The Loews project is the first new convention hotel since the Vista International, now the downtown Marriott, opened in 1985. The Vista faltered financially soon after it opened.

“The premise the city had to build the hotel is that there’s been no new convention center hotel built since 1980-something and the 900,000-square-foot convention center, which is world class, is not getting its share...because the lack of hotel product,” Tisch told The Star.

Tisch said that the new hotel is already attracting “millions of dollars of new business on the books,” but declined to discuss specifics.

“Bookings are well above what we anticipated when we underwrote it,” he said.

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Steve Vockrodt is an award-winning investigative journalist who has reported in Kansas City since 2005. Areas of reporting interest include business, politics, justice issues and breaking news investigations. Vockrodt grew up in Denver and studied journalism at the University of Kansas.
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