Experts say downtown market ‘dead’ for hotels

One local industry expert says “hotel development is dead for at least three years.” But Dean believes the landscape in Nashville is attractive enough to defy that logic.

And while new financial projections released by Metro show Music City Center could pay for itself even without an attached, headquarters hotel, some continue to stress the crucial need for one.

“There’s just no way in the world a bank is going to finance a hotel,” said Drew Dimond of Dimond Hotel Consulting Group in Nashville.

According to Dimond, Nashville’s supply of hotel rooms has steadily increased since 2006, while demand has decreased. Commercial real estate values have plummeted by 40 percent to 50 percent, leaving loan-to-value ratios on many hotels upside down, he said.

All that, he said, combined with tight capital markets paints a bleak picture for any new hotels in downtown Nashville.

“I just can’t see anybody building a ground-up project right now,” he said.

Dean adds up a different set of variables. He believes the Metro Council will approve Music City Center — a $585 million project that would replace the existing Nashville Convention Center with a much larger facility south of Broadway. He believes in developers’ proposals to build a $250 million medical trade center at the site of the existing convention center on Broadway. And he believes capital markets will improve.

“Markets work,” Dean said. “Markets identify demand and fill it.”

If markets don’t improve, Dean hasn’t taken public financing for the hotel off the table. But, he said there’s no reason to put taxpayers on the hook now, especially since a hotel can be built a year faster than the convention center.

Dimond acknowledged the convention center would create its own hotel demand, but he believes it would take extraordinary circumstances — such as 50 percent cash down — to privately finance a hotel in the near term.

Mark Bloom, who works in municipal bonds and is a partner in the Hilton and Union Station hotels downtown, is more receptive to the possibility.

“It’s all a matter of how the economy performs over the next 12 months,” Bloom said of the prospects for private financing. “It just doesn’t exist right now, and it hasn’t for 12 to 15 months.”

Even if Metro is able to strike a deal that involves a combination of public and private financing, Bloom said that would be much more palatable to hoteliers who sour at the idea of a government-owned competitor.

Metro still has an agreement with joint venture Phelps Portman Nashville LLC to develop a Marriott hotel next to Music City Center.

Eric Wilson, president of Greeley, Colo.-based Phelps Development LLC, said it will be easier to determine if private financing is a possibility after Metro completes a feasibility study of the project that includes revenue forecasts. More direction about how many rooms the hotel will include and its exact location will be key.

While Dean and Metro Finance Director Rich Riebeling have promised a hotel with Music City Center at some point, they haven’t committed to making sure one opens at the same time. If approved by Metro Council in January, Music City Center is scheduled to open in 2013.

After last week’s presentation of the financing package to Metro Council members, Riebeling and hospitality consultant Thomas Hazinski of Chicago-based HVS downplayed the need for a hotel to open concurrently with the convention center, noting the proximity of several other hotels to the SoBro site.

But some question whether Music City Center can succeed for any period of time without a hotel.