Volume 2, No. 6
August 2006

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Curtis Brothers Helping To Shape Downtown

Stephen Peck of Kapnick Insurance
Stephen Peck of Kapnick Insurance enjoying a healthy business growth.

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Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Hospitality Business In
Area Picking Up Steam

Events Help To Fill Up Area Hotels With Visitors
Ann Arbor Leads The State In Percentage Of Rooms Filled

Chuck Skelton, president of Hospitality Advisors Group of Ann Arbor, in front of the local Convention Bureau with Sarah Mutschler
Chuck Skelton, president of Hospitality Advisors Group of Ann Arbor, in front of the local Convention Bureau with Sarah Mutschler, Finance Administrator of the Bureau.

By Kate Kellog

Ann Arbor's hospitality folks love summer. It means sweaty Art Fair-goers seeking sustenance and shelter from thunderstorms. Summer Festival events attract diners at all hours. Plumbers and pipefitters, here for the United Association's annual Instructor Training Program, pack every hotel in the area for a week in August. Later in the month, families of University of Michigan and Eastern Michigan students arrive for student move-in. And of course, the home football weekends provide extra revenue to help cushion the lean times.

Even as the June-through-October hospitality bonanza nears its peak, the gloomy cloud of Michigan's economy hovers over these festivities. While Ann Arbor remains somewhat insulated from the state's economic woes, job losses and out-of-sight gas prices don't bode well for leisure spending anywhere.

Direct travel expenditures, both leisure and business, totaled $17.5 billion for the state in 2004, according to the Travel, Tourism, and Recreation Resource Center at Michigan State University. That may sound substantial—but experts say Michigan's tourism industry has never really recovered from the post 9/11 slump. Travel spending in Michigan fell by 1.9 percent in 2003 and grew by 3.5 percent in 2004, according to Travel Michigan, of the Michigan Economic Development Corporation. Michigan's share of the national travel market has been flat, capturing only about three percent of U.S. travel between 2000 and 2004.

Brightening this picture is a recent slight upturn in Michigan's tourism industry, as reported by Don Holecek, spokesperson for MSU's Tourism Resource Center. Tourists spent an estimated four percent more in 2005 in Michigan than they did in 2004, Holecek said. His research team was surprised by this finding, in view of spiraling gas prices and negative economic conditions.

They attributed this growth mainly to a single factor: the near ideal weather pattern that prevailed in Michigan for most of that year. Of course, no one can base predictions for an industry growth trend on factors as variable as Michigan's weather. Performance in the state's hotel sector was not particularly impressive last year. The average occupancy rate (rooms sold divided by rooms available) statewide was 53.5 percent, up 1.3 percent from 2004, according to Smith Travel Research, an information provider for the lodging industry.

They attributed this growth mainly to a single factor: the near ideal weather pattern that prevailed in Michigan for most of that year. Of course, no one can base predictions for an industry growth trend on factors as variable as Michigan's weather. Performance in the state's hotel sector was not particularly impressive last year. The average occupancy rate (rooms sold divided by rooms available) statewide was 53.5 percent, up 1.3 percent from 2004, according to Smith Travel Research, an information provider for the lodging industry.

Ann Arbor's numbers are more encouraging. Hotel occupancy rates averaged about 67 percent for 2005, up 4.5 percent from the previous year. The average daily rate was $89.00, says Charles Skelton. President of Hospitality Advisors Group of Ann Arbor. The city's hotels achieved an occupancy rate eight points higher than the Southeast Michigan area as a whole (59 percent), and an ADR of one dollar higher.

"The good news is that Ann Arbor is at the top of the heap of all lodging markets in Michigan," says Skelton. "In fact, our occupancy rate is higher than the national average of 63-64 percent."

The ADR for Ann Arbor hotels tends to be lower because room rates here are conservative compared to most cities, even in Michigan. Our lower rates are partly due to the presence of the very institutions that attract many visitors—local colleges and universities, explains Jim Koen, general manager of Four Points by Sheraton Ann Arbor.

"Those institutions tend to negotiate aggressively so we can't get the higher dollar," he says. "That means we have to work harder and sell more rooms for less. But at least the demand is such that we have that option."

Hotel occupancy in Michigan is just starting to crawl back up after a precipitous 14-point drop from 2000. With a 67 percent statewide occupancy rate, that year was a banner year for Michigan's lodging industry, says Skelton. "Then came 9/11 and things went down the tubes."

The industry revived slightly here in 2002, only to drop again when the Iraq war started. Skelton believes Michigan's hotels finally began to stabilize in 2004 and started to come back in 2005. "Meanwhile, Ann Arbor just keeps chugging along."

The beginning of 2006, however, was not as good as he would have hoped for hotels in Washtenaw County. The Super Bowl did not generate the anticipated overflow to areas outside of Detroit. "It was very disappointing for this area," Skelton says. "But during the last several months demand has been strong. Now, with the Art Fair, the plumbers and pipefitters, and the overflow from Michigan International Speedway fans, I think we'll have a pretty good year. And Google's announcement to locate here can't hurt!"

He predicts that U-M Football weekends will bring all area hotels to their top rate ranges. Although everyone fills up during home games, business isn't what it was ten years ago, when nearly all hotels required two-night minimum bookings. "But compared to an average fall weekend, home football weekends still win hands-down for business," says Skelton. Koen, of Four Points by Sheraton, reports that occupancy is flat at his hotel, but room rates have gone up. While a few area hotels outside of Ann Arbor are experiencing problems, Four Points is holding its own. Ann Arbor is fortunate to remain well above average, he says, since the state ranks 49th nationally in hotel occupancy.

"Detroit's challenges within the auto industry, combined with fuel costs, are limiting leisure travel throughout the state," he says. "I hear that resort hotels up north are having some real challenges."

Even Washtenaw County hotels in small communities such as Chelsea are challenged by the softening in leisure travel, Koen says. Ann Arbor hotels, on the other hand, don't depend solely on weekend races and football games. Business travelers generate a stronger demand during the week here, he says. "The big companies like Borders and Pfizer can afford to pay for business travel despite the horrible fuel costs. And we've got the educational institutions here. The U-M is our biggest night generator."

Likewise, EMU, Cleary College, and Washtenaw Community College provide business for the Ypsilanti Marriott and Comfort Inn, he adds. "We can be fairly confident that, whatever happens with the economy, those schools and the U-M will keep us busy." On the west side of town, one long-time establishment remains a popular destination for both leisure and business travelers. Business for the first half of 2006 at Weber's Inn and Restaurant is ahead of last year's, reports Ken Weber, president. That's despite the state and county's economic troubles that have kept the hospitality business down here, while the nation's has rebounded somewhat.

GM's problems, compounded by the raising of mortgage rates, have had a dampening effect on spending in the area, Weber believes. "The hotel business has been lousy since 9/11," he says. This is the first year that the industry has generated as much revenue in the county as it did in 2000. Although we've finally gotten back to 2000 levels, when you adjust for inflation, we're actually still behind."

But Ann Arbor's vibrant downtown, recreational attractions, and sporting events ensure decent occupancy rates for hotels like Weber's even when the economy is down. Another advantage is that Washtenaw County hotels have the lowest room tax (two percent) in the state. Customers may pay about ten percent less per night in taxes here than elsewhere in the state, including Detroit and Grand Rapids, notes Weber. "Lower room taxes help for conference business and make this an affordable town for weekend getaways."

"At the same time," he adds, "People don't go anywhere if they're not working."

Weber's restaurant has done quite well considering the increasing competition in town. Over the past couple of years, five new restaurants have opened in Weber's vicinity. "Ann Arbor has a great restaurant market but the supply keeps increasing," Weber says. "There are only so many people to serve." While demand is still high, he notes diners are no longer queuing up seven nights a week.

Casual dining is down across the country, reports USA Today. For the first time in years, sit-down restaurants that generally serve alcohol and sell entrees from $10 to $20 are taking a hit, according to USA Today's July 18 issue. The story attributes the decline to rising gas costs, upgrades in fast food choices, higher credit card costs and the weaker real estate market.

But most of the restaurants referenced in the story are big chains like Applebee's and Outback Steakhouse. Ann Arbor is blessed with many unique independently-owned eateries that continue to attract both locals and out-of-towners. However, even extremely popular restaurants—like those in the MainStreet Ventures group—are not immune to challenges of the economy, inconsistent weather and near constant road work in the area. Business is flat, on average, for MainStreet Ventures' six Ann Arbor restaurants, says Mike Gibbons, president. The company has not increased prices. While Ann Arbor has not felt the brunt of the stagnant economy as much as other restaurants in the state, the eatery business has seen better summers, he says.

"The weather has been crazy this season," says Gibbons. "We've had lots of rain, then extreme heat in July. Normally we get a lot of outside dining business at this time, especially on the rooftop at Palio's. Added to the weather, road construction has made travel pretty tough."

Similar issues have slightly softened business for the company's Toledo restaurants as well. Gibbons is counting on better conditions for the remainder of the summer, which is by far his most important season here. "Football weekends bring a lot of business, but that's only six or seven nights per year," he says. "We count on being busy seven nights a week during the summer."

Any upturn in the hospitality industry at the state level, will of course help local restaurants and hotels. Statewide, prospects for an increase in tourism spending remain very uncertain. MSU's Tourism Resource Center reports that Michigan has a large travel trade deficit. That is, Michigan residents spend almost $3 billion more per year on out-of-state trips than non-residents spend on Michigan trips.

This fact particularly frustrates Chuck Skelton. He notes that, about 15 years ago, Michigan was spending $10 to $12 million to market tourism, ranking it fifth or sixth in the country. Now the state's tourism office budget has been cut about in half and Michigan's national rank for tourism spending has fallen to 34.

"A lot of golf courses up north are just sitting there and hurting," he says. "We have great vacation areas there and on the state's west coast. But we can't just sit in our beautiful state and expect folks to come here without promoting it."

MSU's Tourism Resource Center, in cooperation with Travel Michigan is working on a strategic plan to guide Michigan's tourism industry to a more profitable future. Among the plan's goals is to develop partnerships between business and government needed for lobbying action. MSU team leader Don Holecek says even a modest increase of $5 million in Travel Michigan's tourism budget would increase direct tourism expenditures by $300 million.

"The ability of Michigan tourism to solve problems has been demonstrated by the passage of post-Labor Day school opening legislation," he said in his presentation of the strategic plan. And in an editorial in Michigan Tourism Business, he writes: "Government can be part of the solution, but only if pushed by the private sector to be a full partner."