Study: Hotels ‘crowding out’ other businesses

Tourism makes overnight rentals top dog in Moab

Restaraunts are located by lodging facilities, but studies question whether there is an adequate variety of other businesses. Photo by Carter Pape

Overnight rental operations are profiting so heavily from tourism that they are directly preventing other types of business from starting up, according to a study from early 2018. The findings were corroborated by an economic study completed earlier this month.

The first analysis, conducted by national consulting firm BAE Urban Economics, reported that the development of hotels in particular “has driven up prices for commercially zoned land and is crowding out other commercial uses, such as restaurants.” The study was released in March 2018.

A second analysis, released by BAE two months after the first, showed that hotel developments could bear higher government fees during development than other business types, showing hotels yielded significantly higher profits than other types of businesses.

The third and most recent analysis, conducted by economic consulting firm Lewis Young Robertson & Burningham, Inc. (LYRB), showed that demand for overnight rentals is outgrowing the population of Moab, leaving the area with a locally based workforce that is shrinking in comparison to the seasonal need for labor.

The City of Moab and Grand County are now working on ordinances they hope will enable new developments besides short-term rentals to become viable where they currently are not.

One mechanism the city is likely to use is limiting the areas in town where short-term rentals are allowed, thus giving space for other commercial uses to grow. The other is mixed-use development requirements, which would force developers who are hoping to build a hotel to also construct a restaurant or other business.

Office, retail developments ‘infeasible’ even in a strong economy

The BAE analysis from March 2018 showed that, despite demand for certain businesses, hotel projects have outcompeted them for resources like labor and property.

“Local real estate professionals agree on the need for more restaurants and pent-up demand for space to accommodate tourist-related businesses,” the report reads. The report later says, “Retail must compete with hotel projects for land, but cannot afford to pay the same prices, particularly in commercially zoned districts.”

The study analyzed the feasibility of office space developments and retail developments, alongside hotels. The definition of a “feasible project” used in the study was one in which “a developer is earning a reasonable profit commensurate with the risk related to the development.”

Despite reporting pent-up demand for both retail outlets and office space, the study showed that the economic fundamentals made either type of development infeasible, even in strong markets.

“Under current market conditions, only hotels were feasible and could support paying a fee for workforce housing,” the study reads.

BAE later confirmed this finding, showing that hotels were the only developments locally that could support paying an impact fee to the city or county meant to subsidize the cost of building affordable housing.

Hotels could afford to cover other business’ housing impacts

In its follow-up analysis released in May 2018, BAE conducted a study calculating impact fees that the city and county could legally and feasibly charge to various types of developments. A complete explanation of these calculations is available in the study, available at moabtimes.com.

In cases of retail and office developments, developers could turn a profit in some cases, but they would not be able to cover the full cost of their calculated impact to the community. In particular, this was due to hotels outcompeting other businesses for property and construction labor.

For hotels, the feasible fee they could afford to pay, due to their high returns on investments, was “considerably” higher than what BAE calculated to be their impact to the community, according to the study.

Specifically, hotel developments overall were profitable enough to cover their own impacts twice or three times over.

However, even if hotels in Moab can bear higher impact fees, the city and county cannot legally charge them more. Municipalities must be able to prove in court that the amounts they charge for impact fees are legally justifiable, a requirement created by the U.S. Supreme Court through various precedents.

Thus, although hotels in Moab can afford to pay more in impact fees than they are currently charged, as some argue, they are legally protected from doing so.

BAE recommended in its study to charge only hotels the impact fee, so as not to overburden retail and office space developments from being built and flourishing.

Spending on accommodations in Moab is 20 times state average

This chart shows the economic sectors of Moab in which per capita spending is the highest compared to Utah’s state average. Accommodations have a high capture rate, meaning a large amount of money flows into the Moab economy via spending on accommodations.
Data courtesy of Lewis Young Robertson & Burningham

The third study was conducted by Lewis Young Robertson & Burningham, Inc., an economic consulting firm based out of Salt Lake City. The firm completed its study for Landmark Design as part of their efforts to assist Grand County and the City of Moab in developing land use regulations for overnight rentals.

One of the findings from the LYRB study was that, to keep pace with demand, the already large accommodations sector in Moab would need to continue growing.

“Continued development in overnight accommodations will be needed to match growth in tourism demand,” the study reads.

In its analysis, the firm calculated that the amount of money spent on accommodations in Moab per capita (i.e. divided by the number of residents) was more than 20 times the state average. More money flows into Moab through nightly rentals than through any other category of business.

The category second-highest in per capita spending was gas stations at roughly 13 times the state average, and the third was the “Transportation & Warehousing” sector at roughly nine times. Transportation businesses provide sightseeing transportation, airport operations, mail and package deliveries and other transportation-focused services.

Among the most under-performing sectors: sellers of electronic and appliances, sellers of general merchandise, business consultants and public administration (e.g. Grand County and the City of Moab).