Phoenix ultimately sold the hotel bonds in December 2005, and the new city-owned Sheraton hotel opened in October 2008, just before the full convention center expansion was completed. Things would not work out quite the way the consultants had forecast and the city staff had promised.
The Phoenix case neatly exemplifies the dynamics and results of contemporary convention center development. A proposal for a new center or a major expansion appears to bubble up from a longstanding policy stream, often focused on downtown development and revitalization efforts. The idea comes buttressed with a seemingly compelling logic: the convention center is now old, competing cities have expanded and added more space, and expansion will bring enormous benefits in terms of spending, tax revenues, and job creation. A consultant study (or series of studies) documents the “need” for a larger convention facility, describes the expansions and additions of competing cities, and presents a highly precise forecast of expected performance and economic benefits. Local business leaders endorse the plan, and it receives an enthusiastic reception on the editorial page of the local newspaper. And, with little or no opposition, the plan receives the formal approval of the local mayor and city council.
Two central dimensions of convention center development provided the foundation for Phoenix’s expansion quest. The first was the manner in which the expansion was proposed and structured. The expansion proposal came before the public and the city council by itself, not as part of any larger consideration or plans. It did not result from a broad analysis of downtown revitalization or even tourism development. Indeed, it seemed to result from the failure of the efforts to develop a new privately built, albeit subsidized hotel.
During the entire period that the Civic Plaza expansion was being considered, from 1998 through the November 2001 city vote to the funding decision by the state legislature in mid-2003, there was no consideration of alternative visitor-related projects or different uses for the city’s $300 million investment. The city staff never offered the council or mayor an array of policy choices, or even a range of sizes and costs for the expansion itself. The proposal was literally a major investment in doubling (ultimately tripling) the size of Civic Plaza, or nothing.
The financing of the expansion was also structured in a narrow fashion, clearly designed to deal with the realities of voter sentiment while observing the formal, legal constraints on city spending. Both city staff and elected officials would no doubt have preferred to avoid any direct public vote on the project. But a 1989 amendment to the city charter required a vote on any sports or convention-related facility project costing more than $3 million. The city faced no alternative, and so structured the expansion proposal to make it salable to a tax-concerned electorate.
The vote authorization stressed that “The ballot proposition does not ask voters to authorize any new tax or funding sources,” and “under no circumstances will the project result in an increase in any city tax rate.” The proposition also stressed that the city government would only be responsible for half the cost—with “an additional $300 million from state or other funding sources.” And the city’s case for the expansion repeatedly stressed the imperative to compete with other places: “While Phoenix is the 6th largest city in the nation, we have only the 60th largest convention center. Other cities have been more aggressive at expanding and modernizing their convention centers, and have realized the economic and community benefits.”23
The second central element of the expansion effort in Phoenix was the reliance on outside, presumably expert consultants. The initial expansion proposal was accompanied by a study from PriceWaterhouseCoopers that appeared to endorse an expansion, with the promise that more space would allow the city to “Attract additional new and/or larger events to Phoenix,” “Increase capabilities of hosting simultaneous events by multiple users,” and “Increase patronage to downtown business including hotels, restaurants, retail shops, [and] entertainment and cultural venues.”24
The 1999 PWC report concluded that an expansion paired with 1,050 new hotel rooms would double convention attendance and thus increase attendee spending by a total of 86.5 percent. And when the city enlarged the scale of the expansion, it obtained another consultant study, from Ernst & Young, that was even more certain and expansive: convention and tradeshow attendance would grow from the 133,000 of 2002 to over 375,000 after expansion.
These consultant analyses and forecasts were effectively the only substantive market or demand information provided to the city council, local media, and public. They were presented as authoritative, with no sense of a range of alternative outcomes, “best” or “worst” cases, or even detailed discussions of the assumptions upon which they were based. Nor did the city staff, or any local group or organization, commission any competing or alternative analysis. Indeed, the assumption that Phoenix had to see a substantial boost in its convention business was accepted and regularly reported as an article of faith. That faith was neatly summarized in an Arizona Republic editorial before the November 2001 vote:
What’s more, a doubling of the size would allow Civic Plaza to handle multiple events, an advantage that not only helps expand business, but helps even out the ebb and flow of conventioneers into downtown Phoenix. It would help keep downtown businesses stable. It would help downtown thrive. A “yes” on Proposition 100 will allow the Valley of the Sun to continue competing for conventions and the wealth of tourism dollars that flow from them—nearly a third of convention travelers to the city venture around the state either before or after their event. And it will allow that to happen without an increase in city taxes.25
Much the same thing occurred with the proposal for a 1,000-room convention center hotel. The argument for a major hotel voiced by the Phoenix Community Alliance in 1992 and the “need” established by PriceWaterhouseCoopers in 1999 were never questioned. The repeated reluctance or inability of any private developer to finance such a project was taken not as a measure of risk but as simply a short-term impediment to be overcome. As they had before, the mayor and council relied on the assessment and professionalism of the city’s managerial staff. And the staff reported, “Having confirmed that a privately financed downtown hotel is not feasible through developer input, staff research, and outside consultant advice, staff’s findings support the publicly financed hotel model as the most reasonable and expeditious course to achieve the City’s downtown hospitality objectives.”26
The new city-financed Sheraton hotel was thus reviewed and approved by the City Council in much the same fashion as the Civic Plaza expansion. The city relied on expert consultant advice from Warnick and Company and HVS International in establishing both the future financial performance of the hotel and its place in downtown Phoenix. HVS simply relied on the Ernst & Young estimate of 375,000 total convention attendees post-expansion, and argued that these would produce 289,282 annual added room nights to support the planned hotel, yielding a 63 percent occupancy rate by 2010 with an average rate of $164.90. Warnick, in providing a “vision statement” for the hotel, contended, “All great cities have a great urban hotel, which becomes the focal point for that city‥…The downtown Sheraton Hotel is to be that great urban hotel for the city of Phoenix.”27
The Phoenix Convention Center expansion and the adjacent 1,000-room Sheraton proved to be rather more a house of cards than an economic engine and “focal point for the city.” In its first full year of operation, 2009, the expanded convention center drew 309,729 convention attendees who produced 358,632 room nights of hotel demand. Those were short of the Ernst & Young and HVS estimates, but a respectable showing. But attendance faltered for fiscal 2010, hitting just 229,097, and for fiscal year 2011 (through June 30, 2011) came to just 156,126.
As the center’s attendance slipped back to what the smaller Civic Plaza had been producing in 1995 and 1996, the city-owned Sheraton also stumbled. Occupancy for 2009 was just 49.4 percent, at an average daily rate of $163.90. The 2010 occupancy grew to 52.5 percent, but the rate slipped to $158.34. At the end of 2010, Moody’s Investors Service downgraded the hotel’s bonds. In September 2011, Moody’s placed a “negative outlook” on the bonds of the city-owned Sheraton, noting the rating firm’s “expectation that, over the next 12 to 18 months, the hotel will likely struggle with improving its occupancy levels