Rendering of the proposed Four Seasons hotel.
Minneapolis-St. Paul, at 3.6 million residents, is the nation’s largest metropolitan area without a hotel awarded a top ranking from the most influential U.S. rating guides. The city that hosted a Super Bowl earlier this year shows no signs of erasing that distinction soon.
A lack of demand is thwarting a real estate developer who hoped to erect a luxury hotel on a Minneapolis site that’s home instead to a parking lot and a defunct bus shelter.
Not helping matters is that the Twin Cities is the biggest U.S. metropolitan area to average at least 153 days a year below freezing, according to the most recent statistics from the National Climatic Data Center.
Minneapolis has been trying to lure Toronto-based Four Seasons Hotels and Resorts, majority owned by Microsoft founder Bill Gates and a Saudi prince, Al-Waleed bin Talal, but the chase is growing cold.
“Cities with the highest concentration of five-star hotels – Macau, London, Paris – all have a few important elements in common, such as proximity to major international airports, transport, entertainment and business infrastructure,” Amanda Frasier, executive vice president of ratings at Forbes Travel Guide, wrote in an email.
The Four Seasons hotel was to be the centerpiece of Minneapolis-based United Properties’ proposed Gateway Development. The firm cited declining occupancy and room rates as factors in delays but hasn’t given up its vision for a 34-story tower downtown.
No hotel in the Twin Cities has earned a top rating of five diamonds in recent history from the American Automobile Association, known as AAA, though 15 fell into the next-best category for 2018. The difference between a four-diamond and a five is significant, said John Lubanski, a regional manager with AAA’s rating service. A four has the bones of a five, meaning that its physical makeup is of the highest quality – think polished marble accents, not granite; artwork you might find in a museum; and furnishings made with the finest materials. What pushes a four to a five is the service provided by the staff, he said.
For its part, another top rating system, the Forbes Travel Guide, is more weighted toward service, which a five-star hotel will execute “flawlessly,” Frasier said.
Forbes has never given a hotel in Minnesota five stars, according to records dating back to 1958, though it has had four-star hotels in the past. There were several four-star hotels in the Twin Cities in the ’60s, ’70s and ’80s, Frasier said, before the area went through a long dry spell. The most recent establishment to earn the four-star distinction was the Hotel Ivy, which held the rating from 2011 to 2017, but was recently knocked down a notch. It is currently “recommended” by Forbes, as is the Saint Paul Hotel.
The closest five-star hotel is the Kohler resort, which is a five-hour drive away, located the neighboring state of Wisconsin.
Of the 20 largest U.S. metropolitan areas, only Minneapolis-St. Paul and Tampa, Florida, population 3.1 million, has neither a five-star nor a four-star establishment from Forbes nor a five-diamond rating from AAA. Hotel analysts say they consider Forbes and AAA to be the most influential ratings systems for U.S. hotels.
Relative to its peers and even smaller urban areas like St. Louis or Nashville, Tennessee, Minneapolis does not have major luxury hospitality brands like the Ritz-Carlton, Fairmont, the Belmond or Rosewood, though it does boast a Loews, a brand-new InterContinental near its international airport and a solid portfolio of boutique hotels like the Ivy and The Hewing.
The dearth of jet-set brands is not for lack of effort, however.
New Label: Plan A
Executives at United Properties are now calling the original 2016 proposal for their downtown development Plan A: a stairstep tower that would rise on 30 Third St. S., a 1.7-acre lot three blocks south of the Mississippi River. In addition to the 250-key hotel, the spire would house offices for Royal Bank of Canada, known as RBC, and be crowned by seven levels of condominiums, also branded the Four Seasons.
After two years of negotiating with the Four Seasons, the pieces were almost all in place. United Properties already owned the land, and had a partner on board, JMI Realty of Austin, Texas. Its architect, Smallwood, Reynolds, Stewart, Stewart and Associates of Atlanta, designed the Four Seasons in Doha, Qatar, and the Ritz-Carlton in Charlotte, North Carolina.
There seemed to be no serious environmental issues at the site, which was home to three iterations of the storied Nicollet Hotel from the 1850s to 1991. United Properties even made sure the glass structure would be bird-safe, thus avoiding a furor about birds flying into the structure and dying that surrounds the Minnesota Vikings’ stadium.
Nevertheless, the United Properties deal has not come together.
That lack of success comes as statistics from hotel data company STR suggest a market in a slump. Over 2016 and 2017, occupancy rates took a slide. In 2015, the market’s occupancy rate was 68.3 percent. That figure dipped to 68 percent in 2016, and then took a more precipitous dive in 2017, landing at 66.9 percent for the year.
And while during 2016 Minneapolis-St. Paul’s average daily rate and revenue per available room both grew by more than 5 percent, in 2017 each measure took a tumble. The average daily rate for 2016 was $118.38, and revenue per available room sat at $80.52. In 2017, the average daily rate slipped to $115.95 and the revenue per available room slid to $77.61.
This year, all measures shot up, but that is probably because of the outsize influence of hosting Super Bowl LII.
“The Minneapolis market is perceived as softening, so it’s not an ideal time for hotel development. This being the first five-star development makes for additional challenges with underwriting,” United Properties Vice President of Development Rick McKelvey told a downtown neighborhood group on Aug. 6.
Similarly, Liz Rammer, president and CEO of the trade group Hospitality Minnesota, pointed to a recent surge in hotel inventory, which is causing some slackness in the market. She also said past attempts had been felled by a lack of city financing.
Timing is perhaps not on United Properties’ side, agreed Jan D. Freitag, senior vice president of Lodging Insights at Hendersonville, Tennessee-based STR.
“We just passed the 100th month of [revenue per available room] growth. That’s a really long cycle, and we’re way overdue for a correction,” Freitag said, adding that lenders could be leery of financing such projects right now. “The bank doesn’t want to be caught holding the bag. The worst-case scenario is that the developer defaults before the building is finished.”
That sounded like an accurate assessment to Matt Mullins, a hospitality analyst with the Twin Cities firm Maxfield Research & Consulting.
“We’re definitely at the peak of the market, and lenders are getting very cautious,” Mullins said. “It doesn’t help that overall development costs have gone up so much either. It’s out of control.”
Concern Over Fundamentals
Nevertheless, some statistics suggest that on a more fundamental level the underlying economics of Minneapolis-St. Paul’s hotel market do not yet support an establishment as expensive to run as a five-star hotel.
The number of visitors to the Twin Cities has steadily grown in the post-recession era, from 25.3 million in 2010 to 33.3 million in 2017, according to the city’s tourism and convention bureau Meet Minneapolis. Even so, three of four of those visitors came from regions within 500 miles of the city — outstate Minnesota, Wisconsin, Iowa or the Dakotas — and half of them were day-trippers.
Only 29 percent of visitors to Minneapolis were business travelers, who are typically the customers who can pay room rates at the loftiest end of the hospitality trade.
“The average daily rate for a luxury-level room in the U.S. is $337, which means a lot of nights those rooms go for $600 to $700. That means that if you’re a hotelier, you have to ask yourself: Do you feel comfortable putting 100 to 300 hotel rooms into this market, and can you charge an average of $350 a room?” Freitag said. “For Minneapolis, the average room rate is $124, and that is skewed up because of the Super Bowl earlier this year. The room rate got a 9.67 percent bump, and at least half of that was because of the strong February the city had.”
Minneapolis-St. Paul’s layout and location could also play a part, AAA’s Frasier said.
“If the infrastructure will not support the cost invested per key to build a luxury hotel, it will not be in a position to demand an acceptable average daily rate,” Frasier said.
As for the Four Seasons, McKelvey said on Aug. 6 that United Properties is still on the chase, though the company will have to make a final decision about it this month before it submits a land use application. If United is not able to nail down the hotel, it will shift to Plan B: a 30-story office tower, with retail on the ground and skyway levels.
Though RBC would be an anchor tenant, United Properties would have to fill about 400,000 square feet of additional office space, McKelvey said.
“My gut tells me it is going to be Plan B,” said Randy Manthey, a member of the neighborhood’s land use committee.
A city’s hospitality scene can vault to the next level, even if it does not land a big-fish brand, Lubanski said. A case in point is Dallas, which did not have a five-diamond hotel until this year. An 11-year-old Ritz-Carlton made the jump by investing in both renovations and cultivating a stronger service ethic.
“The culture is the hard part. It takes time and effort and consistency,” he said.
