MEMORANDUM

To: Mayor Morrissey, John Groh, Todd Cagnoni

From: Rob Hunden, Hunden Strategic Partners

Date: January 24, 2015

Re: Proposed Boutique Hotel Project

With the recent change in the proposed boutique and extended stay hotels by Joseph James from multiple small buildings and room counts to one larger 76-room boutique hotel, questions have arisen regarding the ability of the market to absorb and support both the boutique hotel project and the proposed Amerock Embassy Suites project. There are several reasons that the two proposed hotels (Amerock and Joseph James boutique) are better as an “all of the above” strategy, than focusing on one or the other.

The reasons for HSP’s support of both projects can be summed up as follows:

§ Improved boutique hotel concept is more viable now than prior version

§ Boutique hotel is different product and size than Amerock Embassy Suites

§ Both hotels are new product types that add to Rockford’s appeal & make market bigger

§ Critical mass of downtown options is safer bet than one solo project

§ Overall increase in supply is minimal

§ Market timing is excellent. Better to add during strong market than weak market.

§ New sports project and existing downtown attractions will benefit from both projects.

§ Amerock’s group business can easily overflow to boutique hotel nearby instead of miles away.

§ If these hotels are not added, a developer will add more of the same select service hotels by I-90, which is not helpful to the destination.

The change to the boutique hotel is positive change. One larger boutique will enable the project to be more successful than it otherwise would have been, due to building, cost and operating efficiencies generated by having all rooms in one location. Also, there is a serious amount of efficiency that comes in operating a hotel as it gets larger, up to about 80 rooms. This is why so many of the prototypical branded hotels are sized at approximately 70 – 90 rooms. The upshot is that the more likely this hotel is to succeed, the less likely it is to do damage to other hotels by needing to lower rates to bring up occupancy.

Second, the proposed hotel is a boutique hotel. It is not replicating anything in the market today, nor is it replicating the Amerock project. HSP would not suggest that two similar hotels be developed at the same time, nor would we recommend that one of these hotels be similar to any that exist in the market. The current market consists of older full service properties and newer limited or select-service properties. The new product downtown will be different in both cases than what exists today. So even if these were out near

I-90, they would enhance Rockford’s hotel package. The fact that both are downtown actually helps Rockford generally and downtown specifically.

The new group hotel makes the Rockford “pie” bigger because it will induce new group demand to the market and provide an opportunity for groups to stay downtown, as well as others. The new boutique hotel proposed does not detract from that, but actually gives guests to either property comfort that they are not pioneers staying downtown, but part of an active burgeoning downtown, with new restaurants, hotels, sports facilities, etc. The new boutique hotel makes the Rockford hotel demand “pie” bigger because it will induce new corporate and leisure demand to the market. Often these people were bypassing Rockford because there simply was not a compelling place to stay, so they made a day-trip instead of an overnight. The success of the 21c and other boutique hotels in other markets (like the 21c hotels in Louisville, Bentonville, Cincinnati and soon in Durham) is evidence of this. While we do not know the ultimate quality level, it will be unique enough and upscale enough to induce demand. Both projects should be able to recapture some of the new impact that they generate.

The Amerock hotel team should not fear the proposed boutique hotel, but welcome it as a neighbor that can work with it to host even larger groups between the two hotels than it can host alone, all downtown.

The overall increase in Rockford’s hotel supply is minimal and supply is very tight now anyway. The hotels, if they are built and open soon, will open into the strongest, tightest market that has existed in Rockford’s recorded hotel history. This is a much better time to open than in a weak market. The market is so strong now that if these hotels are not built, it is highly likely that one or two more select service or limited service hotels –which are extremely similar to what already exists – will be built near I-90. This will not improve the overall market attractiveness for group or higher end corporate business and will likely just take from existing hotels.

With only the Amerock downtown, that single hotel will have a hard time luring groups who need hotel room blocks larger than it can provide. As a result, having a neighbor nearby instead of miles away near I-90, will help it overflow these groups (or compress corporate and leisure demand) to the nearby boutique and help them both “package” groups better. This will likely come into play with the downtown sports complex, as it lures tournaments. The proposed boutique will help enable a downtown packaging ability that would not exist otherwise.

The only issue that may cause consternation is a simultaneous opening. However, if the projects open at least six months apart, this will allow each a ramp up period. Such a period is the toughest for any hotel, so the spotlight and market demand should be focused on each for their first few months. Given that financing drives timing, it is very hard to dictate timing at this stage for either project. But to the extent that one can open first and separate from the other, it will help itself (and pave the way for the other).

As stated in my prior memo: “It would not be smart to develop a very large hotel downtown that equated to a large increase in the hotel room supply, especially one that replicated the brand/quality level that already exists.” However, the proposed boutique hotel is unique enough and high quality enough that it should not negatively impact the performance of the Amerock. They deserve, as economic development projects that will be key pieces of the downtown story, to recoup some of the impact that they generate, in order to be sustained in the early years. Being the first hotels in any downtown, especially one that has struggled to

create a sustained live-work-play environment, is not easy. However, by encouraging the development of both hotel projects, the whole of downtown and Rockford will be enhanced.

In short, the two projects and their restaurant, meeting, event and retail elements will be beneficial for each other and downtown.