Without federal aid, local officials say, the $1.8 billion Washington State Convention Center expansion in downtown Seattle could be out of money by the end of the year, putting 1,000 people out of work and stalling one of the city’s largest-ever construction projects.
Project managers say the economic crisis induced by the coronavirus means they can’t guarantee they’ll be able to sell $300 million in bonds to finance the rest of the project, which is now about one-third complete. Meanwhile, the sprawling construction site at Ninth Avenue and Olive Way is snarling traffic and rerouting transit until the project winds up, currently scheduled for mid-2022.
Developers are asking for a federal grant or a bridge loan to sustain it for the next few years. If they don’t get it, the project will run out of money as soon as next March, said Matt Griffin, the Convention Center addition’s development manager, in a news conference Friday.
“Delaying construction on the addition project would have devastating effects on the construction workers working now, on the hospitality industry,” said King County Executive Dow Constantine at the news conference, warning of a “statewide” ripple effect if the project doesn’t receive the assistance it requests. “The visitor industry is the core of our regional economy, with the Convention Center at its heart.”
So far, the project has been funded by two bonds issued in 2018, worth roughly $1.1 billion, that mature between now and 2058. The Convention Center planned to use revenue from a tax on hotel room bookings — 9% in Seattle and 2.8% in the remainder of King County — to pay back the debt. The state Legislature expanded those taxes in 2018, in part to help developers finance the project.
When the bonds were issued, revenue from that tax had risen by 8% every year since 2010, and the Convention Center was turning away hundreds of events for lack of space. Two ratings agencies graded the bonds as high quality, making it less expensive to borrow the money.
But after the outbreak of the pandemic, downtown hotel revenue fell by 96% from the same period in 2019. A quarter of downtown’s 107 hotels have closed temporarily. Bookings via sites like Airbnb and VRBO, which are also subject to the lodging tax, plummeted so quickly that owners are now trying to lease their units long-term.
Nearly 30 national conventions have been canceled, as far out as November; with them are lost the close to 200,000 hotel rooms reserved for attendees, according to Visit Seattle, a private organization deputized by the city to boost tourism. And Seattle’s cruise season, which was expected to bring 1.3 million people to the city, has been eviscerated.
As the city’s tourism economy tanks, investors have lost confidence that the Convention Center will be able to pay back what it’s borrowed. Yields on the 2018 Convention Center bonds have risen beyond 4%, more than double the yield on 30-year U.S. Treasury bonds, as investors price in the added risk. Typically, yields on highly rated municipal bonds are lower than Treasury securities because the interest on munis is tax-exempt.
A Bloomberg benchmark of similar long-term municipal bonds has a yield of 1.92%.
That could make it difficult for the Convention Center Public Facilities District, a semiprivate entity with the power to impose some taxes within the Seattle city limits, to sell new debt as the downturn continues, Griffin said. The Convention Center had planned to issue about $160 million in new debt this spring, and another $140 million by early 2021.
“People aren’t going to want to buy these bonds until the economy starts to recover,” Griffin said in an interview. The project is also bound by a state provision that mandates it can only issue bonds on proven revenue.
The 1.5 million-square-foot expansion will double the Convention Center’s existing floor space. By square footage and dollar value, it’s one of the largest publicly funded projects in the downtown core — but the Center’s finances are more opaque than other big-budget projects like the $3.3 billion replacement of the Alaskan Way Viaduct.
Project developers say federal funding is needed because the current crisis vastly exceeds their worst-case-scenario planning.
Before construction started in 2018, the Convention Center analyzed what would happen if lodging-tax revenues fell by 20% for two years, a stress test modeled on the Great Recession. The project was “most vulnerable” to a downturn during the 2019-2025 time frame, the study concluded, during the round of bond financing originally planned for this year.
In the event of such a downturn, the report concluded, the Convention Center could lean on reserves, impose more taxes or defer some of its liabilities.
“These aren’t enough,” Griffin said. The Convention Center is estimating lodging-tax revenue to fall by a whopping 60% in 2020, compared to last year.
And while project officials anticipate tourism to Seattle will return to 2019 levels within the next five years, other observers are more pessimistic that travel will recover from what even the industry says will be a long time in the red. For instance, billionaire investor Warren Buffett, chairman of Berkshire Hathaway, recently sold all the firm’s airline stocks.
“The new Convention Center will be an underused asset that requires continual tax dollars to prop it up, at a time when cities and counties and states are looking at huge budget shortfalls,” said former Seattle Mayor Mike McGinn, who took to Twitter in recent days to blast the Convention Center for its lack of budgetary transparency. “That’s the danger in allowing a megaproject like this to get too big to fail. We should be taking a hard look — is there potentially another way to use that project that would provide more public benefit?”
Visit Seattle President and CEO Tom Norwalk said in the news conference his organization is “very confident” that demand for conventions will continue to be strong, but acknowledged cancellations have been “devastating on the shorter term.”
Griffin said he’s not sure yet where precisely the new funding could come from, but that “the real solution comes from the federal government.” The Convention Center has been in talks with local and national elected officials about securing emergency funding for the expansion, he said. House Democrats are voting Friday on a new, $3 trillion coronavirus relief proposal that includes $875 billion for state and local governments, but that package isn’t expected to pass the Senate.