The 30,000-foot view of the convention industry shows a business in the midst of recovery as demand for exhibit space grows, convention center occupancy rates climbs, and meeting attendance rises.

But a closer look reveals some underlying shifts that are altering the landscape. One such shift is that convention and trade show business is starting to flow back into smaller markets, but at the same time, the market has become bifurcated between the winners and losers.

As Robert Canton, director, sports, convention, and tourism services at PricewaterhouseCoopers, explains: “The gap between the haves and the have-nots is growing. When you look at the percent increase we're seeing in the industry, a lot of it is taking place in about 60 percent of the buildings.” The other 40 percent are struggling to fill their centers in a very competitive market flush with supply.

A majority of the “haves” are the first-tier cities like Las Vegas, Orlando, and San Diego, which were gobbling up all the groups they could to fill their buildings through the recession. Now, as demand returns and the big centers start to fill up, business is beginning to move downmarket into some second- and even third-tier venues.

Call it the ripple effect.

Bigger Doing Better?

While not back to pre-9/11 levels, convention center occupancy rates — defined as occupied square feet of exhibit space (demand) divided by available square feet of exhibit space (supply) — for conventions and trade shows are moving upward. Occupancy increased to 38 percent in 2005/2006 from 37 percent in 2004/2005, according to PwC's annual report on the convention center industry, presented in October at the International Association of Assembly Managers' conference in Denver. The largest halls, those with over 500,000 square feet of exhibit space, had the highest occupancy levels, averaging 44.4 percent, which is up from 43.9 percent the previous year, but down from 1999/2000 when occupancy was about 50 percent.

Demand among all 100 convention centers surveyed (27 percent large halls, 46 percent midsized, and 27 percent small centers), is also up, climbing 2 percent to just over 2.5 billion square feet. With this year's increase, on top of a 16 percent jump in 2004/2005, 60 percent of convention centers now report demand at or above 2000 levels.

The largest centers, after a robust 19 percent increase in 2004/2005, saw demand increase just 2 percent in the latest survey. The modest gain is a return to historical growth rates, says Canton. “The more dramatic occurrence is the huge increase we had last year,” he says. “I was encouraged to see that that 19 percent increase was maintained and continued to grow a little bit,” he adds.

Small centers (under 100,000 square feet of exhibit space) and midsized centers (100,000 to 500,000 square feet) experienced much stronger gains than the large halls. Small centers saw demand jump 17 percent, while demand at midsized centers rose 6 percent.

The gains in the smaller centers are significant, but need to be put into perspective, states Canton. “It doesn't take a whole lot to move the needle on the smaller buildings because there's a lot less square footage.” And even with the gains, the occupancy rates at the small- and medium-sized centers are lower than they are in the large halls, hovering around 27 and 28 percent, respectively.

However, the gains are real and there are several factors contributing to the increase in business to smaller centers, experts say.

“The newer buildings opening up in those size categories are higher quality and much more hotel-like and much less like the civic centers of old,” says Canton. “Now it really is a space that is competing much more with hotels and traditional conference centers.”

In Milwaukee it's become quite common for smaller groups to use the convention center as opposed to hotel meeting space, says Doug Neilson, president and chief executive officer of Visit Milwaukee. Convenience is one reason, says Neilson, as the center is connected to two hotels via skywalk. Cost and availability are two others, because it is a buyer's market at most convention centers and a seller's market for most hoteliers. “In a buyer's market, deals are being made to reduce the (meeting space) cost that ordinarily would be greater in convention centers than in hotels.”

Hotel Pricing a Big Factor

The hotel seller's market is having an impact on the convention business in several ways, explains Michael Hughes, associate publisher and director of research services at Tradeshow Week Custom Research, Scottsdale, Ariz. “The hotel package and capacity and pricing is the main site selection driver these days,” says Hughes. “And one of the main decision drivers for [association meeting] attendees relates to hotel quality and, most importantly, pricing.” So, assuming the center has the capacity to handle a specific group, decisions are being made based on the availability, quality, range, and affordability of hotel rooms.

Some second-tier cities, like Portland, Ore., have been able to take advantage of the shift. “Our (hotel) rate recovery is not as strong as other destinations, so we're still a bargain,” says Matt Pizzuti, director of sales and marketing at the Oregon Convention Center. Affordability is one reason — along with being an environmentally friendly facility — why the center saw an increase in number of conventions and trade shows, attendance, and revenues last year, says Pizzuti. Occupancy is close to 60 percent at the center this year.

What's happening, says Pizzuti, is a return to normalcy. “After 9/11, the big cities were eating up anything and everything they could.” And the groups were taking full advantage of the negotiating leverage they had to bring their smaller conventions to major destinations they could never get into before like San Francisco, Chicago, and New York. “Now, the hotel rates in those bigger cities have rebounded and occupancies are high, so groups are coming back to where they belong — the second-tier class.”

But in other second-tier destinations, the hotel market is much tighter and rooms are more expensive, which can work against the convention center. “The good news is, our hotels are doing very well,” says Peggy Daidakis, executive director at the Baltimore Convention Center. “But that also drives the prices up and drives the room blocks down,” she says, as hotels limit the size of room blocks because rooms are in such demand from more lucrative business and leisure travelers. For association meeting planners, that means they have to use more hotels, which can lead to higher transportation costs and less convenience for attendees. “Then they have to make decisions from an economic point of view: Can attendees afford these hotels?” (See related story, page 8.)

Haves and Have-Nots

While the hotel industry is clearly in a seller's market, the situation for convention centers is not so easily labeled. Canton hesitates to say that it's a buyer's market, because it varies by destination. “In some second- and third-tier cities that don't have the destination appeal or the hotel package, absolutely, it's a buyer's market,” he says. “But for the ‘haves,' based on the level of occupancy they are generating, I wouldn't classify it as a buyer's market, I would classify it as a good balance between supply and demand.”

Occupancy rates overall are not what they were in 1999 to 2000, but in places like San Diego, San Francisco, San Antonio, and Indianapolis, buildings are at or near capacity, says Canton. Of the 50 centers that reported data to PwC in both 2006 and 2000, 60 percent of them are generating higher demand now than they were in 2000 — 73 percent more to be exact. The other 40 percent — the have-nots — are dragging down the overall occupancy rates.

Which leads to the question of supply. Since 2000, supply has greatly outpaced demand, resulting in a market where more centers were competing for less business. According to Tradeshow Week data, the number of convention centers in North America went from 389 in 2000 to 458 in 2006. Currently, there are 85.1 million square feet of exhibit space in the U.S. and Canada, up from 82.3 million in 2005 and 65.5 million in 2000. Looking forward, Tradeshow Week says there is another 7.6 million square feet in the pipeline, and by 2010, there will be 92.7 million square feet of exhibit space.

Hughes expects the growth rates for supply and demand to converge over the next five years or so, with supply perhaps growing slightly faster than demand. That means that occupancy rates will probably stay in the same range and competition will remain fierce for years, says Hughes. Discounts, free space, and other incentives will continue to be offered.

Canton agrees: “The have-nots aren't just going to sit there empty. Even if their occupancy levels aren't where they were, you're going to continue to see heavy competition and heavy pressures on rental and services rates among destinations that are competing harder for that business.” But ultimately, says Canton, the winners in the fight for trade show business have several things going for them: destination appeal, a strong hotel package that includes an ample amount of rooms within walking distance of the center, and a quality venue that has enough exhibit and meeting space.

The Attendance Factor

Despite the haves and have-nots, the recovery is occurring, says Canton. Steven Hacker, president of the International Association of Exhibition Management, takes it a step further. He says the industry has almost completely recovered from the post-9/11 bust based on the Center for Exhibition Industry Research's CEIR Index. The CEIR Index — which measures annual changes in net square footage of occupied exhibit space, attendance, exhibitors, and revenues based on data from over 200 events in 11 different sectors — says that all four metrics surpassed 2000 levels in 2005. “All but one or two industry sectors have not only made up the ground that they lost, but they have made gains,” says Hacker. (The index for 2006 won't come out until next April; CEIR is an arm of IAEM). But not everyone is convinced.

Heywood Sanders, professor in the Department of Public Administration at the University of Texas at San Antonio, who caused quite a stir with his 2005 Brookings Institution study that depicted an industry in decline, says the key indicators — attendance and occupancy rates — are not back to 2000 levels. He says his research shows that while both indicators have fluctuated over the last few years, they have essentially been flat.