Selling the millions of cars that came off Detroit-area assembly lines during the most recent recession might have been tough, but filling the more than 1,600 new hotel rooms that came online in downtown Detroit at the same time was likely tougher.
Between 2007 and 2009, three new hotels and one renovated property opened in downtown Detroit, just in time for the economy to crater and push the area’s occupancy rate below the dreaded 50% mark.
“When those hotels came out, the market fell apart,” said Michael O’Callaghan, COO of the Detroit Metro Convention and Visitors Bureau. “It was brutal around here.”
Not so much now. Spurred primarily by a rebound in demand for cars and trucks made by General Motors, Ford and Chrysler, Detroit hotels’ revenue per available room for the first six months of the year jumped 13.8% from a year earlier, trailing only San Francisco-San Mateo, Oahu and Dallas among the 25 largest U.S. markets in terms of RevPAR growth, STR reported last month.
The Detroit market, which consists of about 40,000 rooms, reported a 66.3% occupancy rate in June, putting the metropolitan area on par with overall U.S. occupancy and ahead of markets such as Atlanta, Houston and Tampa-St. Petersburg.
Hoteliers are hoping to benefit further from the $221 million renovation of Detroit’s Cobo Conference & Exhibition Center. The renovation started this year and is due to be completed in 2014.
“If you look at Ford and GM and the stuff they’re trying to do, that’s starting to drive a little demand that [Detroit hoteliers] might not have had during the first half of last year,” said Bobby Bowers, STR's senior vice president. “And there’s just really no new supply there.”
Given the last go-round of new hotels, investors have good reason to be cautious. While never a top-tier destination market, Detroit had maintained an occupancy rate in the mid-60% range.
That was accomplished largely on the strength of the auto industry, which consistently drew business groups to town while supporting leisure travel by auto workers in Michigan and surrounding states who took trips to the Detroit area.
The area also gained a little momentum during the middle of the last decade. In addition to Detroit’s hosting the Super Bowl in February 2006, the auto industry was coming off three straight years of increasing sales, almost reaching 17 million vehicles sold in 2005 and staying above the 16 million-unit level for the next two years.
Meanwhile, downtown Detroit, long scarred by riots and a development flight to the suburbs, was benefiting from the 1996 passage of a proposition that allowed gambling within Detroit. Prior to that, people who wanted to gamble had to cross the Canadian border to Windsor, Ontario.
After the gaming law was passed, three casinos debuted in 1999. In October 2007, the city’s first casino-resort, the 401-room MGM Grand Detroit, threw a grand opening attended by local music luminaries Kid Rock and Anita Baker. It featured restaurants branded by celebrity chefs Wolfgang Puck and Michael Mina.
A month later, the 400-room MotorCity Casino Hotel opened about 10 blocks away. And by early 2009, the 400-room Greektown Casino Hotel had joined the downtown mix, as had the nongaming Westin Book Cadillac, a 453-room hotel that underwent a $200 million renovation.
By then, however, the recession was in full swing. Both GM and Chrysler were preparing to declare bankruptcy, and Ford had just reported a $14.6 billion net loss for the fiscal year.
Recovery started last year. Aided by the U.S. government, GM and Chrysler both emerged from bankruptcy. (Last week, GM reported a net profit of $2.52 billion for the second quarter.)
In addition, financial incentives provided by the state of Michigan for entertainment companies lured movie productions such as Clint Eastwood’s “Gran Torino” and the HBO series “Hung.” The productions helped fill about 60,000 room nights last year, according to O’Callaghan.
Cash-strapped Midwesterners who might have otherwise headed to Las Vegas for gambling and entertainment started visiting Detroit, according to Chris McClain, MGM Grand Detroit’s director of hotel operations.
“We became kind of the ‘staycation’ option for people," McClain said.
While many of the movie-production incentives are no longer being offered, Detroit’s Big Three continue to benefit from a slowly improving economy as well as from a cut in production and shipments from Japanese automakers following the earthquake and tsunami in March.
Through July, GM vehicle deliveries were up 15% from a year earlier, while year-to-date unit sales for Ford and Chrysler rose 12% and 21%, respectively.
Granted, with a $77 average room rate, Detroit remains near the bottom of the 25 largest U.S. markets when it comes to RevPAR.
Still, with no new major hotels in the pipeline and a convention center being renovated, O’Callaghan said he expects the market to remain solidly in the 60-65% occupancy range for the foreseeable future.
“We’ve seen an uptick, and business travel is coming back,” McClain said. “As the Big Three goes, Detroit goes.”