There was a good illustration for this article in the paper, maybe someone can scan it.
Shopping for a tenant
Sunday, April 10, 2005
A plan to remodel the upper floors of the downtown Meier & Frank department store into a posh hotel is winning cheers from retailers who desperately wish to see the landmark building remain a bustling anchor of the city's core.
But not all downtown businesses favor the proposal. Some hoteliers contend the project would subsidize a new rival at a time the overbuilt hospitality business is making a long-awaited recovery. Further, they say, the added rooms could undercut the viability of a hotel proposed to serve the Oregon Convention Center.
Several hoteliers suggested condominium development, setting sales-price records elsewhere downtown.
As details of the hotel plan have firmed up, public discussions have brought out more opposition.
The controversy has left the Portland Development Commission to navigate the competing interests as it tries to prevent the department store building from going vacant and dampening downtown's outlook.
PDC staffers say they are hemmed in by the very thing they are striving to preserve: the building's historical idiosyncrasies. Their options are sharply limited by constraints emanating from the building's quirky and outmoded construction as well as its transit-oriented location, they say.
As a result, the PDC finds itself reluctantly committed to a plan that won't please everyone. Its board is expected to approve the redevelopment deal this month.
"We didn't seek a hotel -- we ended up with a hotel," said Lew Bowers, a senior development manager for the PDC. "We tried everything else."
The proposal has been years in the making. The downtown store increasingly has suffered in competition with flashier suburban rivals, and civic leaders have felt obliged to help save it.
When May Department Stores Co., the St. Louis-based owner of the Meier & Frank chain, moved its 600-employee regional office from the building's upper floors to Los Angeles in 2002, the company heightened fears that it might abandon the store's 96-year-old location. Former Mayor Vera Katz renewed her charge to the PDC that it work to save the store.
A 2002 report, "Downtown Portland Retail Strategy," commissioned by the PDC and the Portland Business Alliance, affirmed her intent, saying the top priority for helping downtown retail thrive should be to ensure the store's continued operation.
Since then, the PDC has steeped itself in renovation plans at an extraordinary level of detail.
A variety of developers considered renovating the Meier & Frank building, and all but one passed on it. The building's configuration makes it too awkward and expensive for condo or apartment development, said Michael O'Connell, a PDC development manager.
In the unoccupied upper floors of the Meier & Frank building, spaces are interrupted by 18-inch columns about every 20 feet. In many places, they rise from the floor close to walls.
That's not the kind of fixture you'd want in your living room, especially if you're paying $500,000 or more for a condo, O'Connell said. Even with apartments, an inappropriately placed column can hold down potential rents, he said.
Column spacing is just one of the many vexing architectural and commercial challenges of redeveloping a building constructed in 1909 and expanded twice.
"On-site parking was a huge issue for the residential developers," O'Connell said, because dwellers of high-end homes would demand parking spots in the building.
But the building is between Fifth and Sixth avenues, on the transit mall, where city rules bar construction of driveways. MAX light rail, where the city discourages driveways, runs alongside the building on Morrison Street. Any parking ramp would cut into first-floor space, the most lucrative for retailers.
"The whole thing was a spiral of expenses that don't make it pencil out," O'Connell said.
Several developers eyed the building's upper floors for condos and decided against it, said Don Mazziotti, PDC executive director. One developer considered those floors for document storage, essentially a lifeless use, he said.
"We have, over a four-year period, looked at a variety of uses with a variety of developers," Mazziotti said.
Enter Sage Hospitality
In 2002, Sage Hospitality Resources, a Denver developer specializing in urban hotel redevelopments, told the PDC it might have a solution: build a hotel.
Hotel development, PDC officials said, appeared to offer more flexibility. Hotel guests, for instance, would be less insistent on on-site parking.
In May, Sage Hospitality announced it had been awarded $72.5 million in federal New Markets Tax Credits for a project to renovate the Meier & Frank building's upper nine floors into a hotel. May announced it would use proceeds from the deal to improve and consolidate the store's retail space in the first five floors.
The credits could produce up to $22 million of the $36.1 million in cash that Sage intends to invest in the $107.3 million project. Another $13.9 million would come from low-interest loans from the PDC. Private construction financing would cover the balance of the project costs.
In February, Federated Department Stores Inc. announced it would buy May, and May officials said they expect the new owner will follow through with the hotel project.
The PDC recently has felt urgency to move forward so that significant demolition work in the upper floors can be completed before this year's holiday shopping season, Mazziotti said.
O'Connell is negotiating agreements with May and Sage. Each contract requires approval of the five-member PDC, which is expected to vote on them April 27.
Hotel market "saturated"
Downtown hoteliers said they feel conflicted.
On one hand, they want to keep Meier & Frank as a downtown drawing card. On the other, they chafe at the idea of the city subsidizing a competitor in what they see as an oversupplied market.
"The hotel market is saturated," said Chris Erickson, general manager of the downtown Paramount Hotel. With the addition of the Hilton Executive Tower in 2002 and a few small projects in the works, he said, "this might be a little bit of overkill."
Hotel operators and market observers say the downtown hotel market is recovering. But some say Sage is overly optimistic in its market forecast.
Sage says the fear of excess room supply is unfounded. The high-end downtown hotel market, it says, is poised for strong gains before its hotel could open in late 2007.
In 2004, visitors booked 825,501 room nights in the downtown's 12 fanciest hotels -- 5.7 percent more nights than in 2003, according to a report by HVS International, a consulting firm hired by Sage Hospitality. The gain of 44,543 bookings pushed occupancy to 71.5 percent, up almost 4 percentage points over the previous year. Hoteliers registered $80.94 in revenue per available room -- 6.5 percent more than in 2003.
In two years, high-end hotel occupancy could rise to 77 percent, according to HVS International. The addition of Sage Hospitality's 330 rooms would lower the occupancy rate of the 12 competing hotels by just 2 percentage points, said Ken Geist, executive vice president of Sage.
But Brad Hutton, area vice president and general manager for Hilton Hotels Corp.'s downtown property, said Sage Hospitality's forecasts are flawed.
"The overall picture of that hotel is being painted way too optimistically," Hutton said.
The recent increase in downtown occupancy mostly resulted from the Hilton's expansion, Hutton said. The expansion enabled the hotel to lure small convention business and some airline crews under long-term contracts, he said.
Sage Hospitality's hotel, which would not offer substantial meeting space, would not benefit from such business, Hutton said.
"They're going to be forced to bottom-feed as a hotel company, compared to where they believe they're going to be," Hutton said.
Dylan Rivera: 503-221-8532; email@example.com