Bloomington grapples with hotel vacancies

In good times, dozens of Bloomington hotels lure travelers with their proximity to Minneapolis-St. Paul International Airport and the Mall of America, bringing millions of dollars in lodging taxes to the city annually and supporting hundreds of other businesses.

But COVID-19 has ravaged the hotel industry, leaving Bloomington officials to patch a multimillion-dollar budget hole and plan creative solutions in case some hotels don't survive.

"The pandemic has shone a light on how important that industry is to us," said Schane Rudlang, Bloomington port authority administrator. "Losing that money is a big impact to the city, no doubt."

With 47 hotels and just under 10,000 hotel rooms, Bloomington has about one-quarter of the rooms in the metro area. In comparison, Minneapolis also has 47 hotels and nearly 9,000 rooms, including five properties that are shuttered permanently or temporarily, a Meet Minneapolis spokeswoman said.

Bloomington collects a 7% lodging tax whenever someone rents a room. Normally, lodging and admission taxes from entertainment bring in about $10 million to the city's general fund annually, said Kari Carlson, the city's budget manager.

But with lodging tax revenue hovering at about a third of pre-pandemic levels, the city lost $6 million in 2020 and projects a loss of $4.3 million this year.

Those losses were why Bloomington had "a major budget shortfall" this year while many others did not, Carlson said. Looking ahead, lodging and admission taxes will make up a smaller portion of the city's annual budget — 6% in 2021, compared with 13% in 2020, officials said.

"Normally we really pride ourselves on having … a robust hotel and entertainment industry that has lodging and admission tax," Carlson said. "But when it stops really suddenly, then it can cause problems."

City officials kept Bloomington's 2021 property tax levy increase to 2.75% by eliminating 23 full-time positions, increasing some parks and recreation fees and reducing the number of ice skating rinks. Overtime pay, travel and training budgets were cut, and — among the most visible and controversial cuts — the city's Driver and Vehicle Services office closed, Carlson said.

It could take five years to truly rebound from COVID-19, though Carlson said she hopes some pent-up demand for travel will emerge. But city officials are also anticipating permanent losses, with a couple of hotels — possibly 500 to 1,000 rooms in all — likely to fold before the pandemic ends. The city's planning commission will study hotel conversion this year, specifically what it takes to turn hotels into apartments.

"It all comes back to this just general abundance of hotels that we have," said Jon Solberg, Bloomington planning commission chairman. "What are our options?"

Ben Wogsland, government relations director for Hospitality Minnesota, said no industry has struggled the way hotels have during the COVID-19 pandemic — and losses in the hotel industry extend to businesses that serve hotel guests, from restaurants and shopping centers to bike rentals.

"This has been the most challenging year for hotels in memory," he said. "And it's probably worse in Minnesota than the national average."

A majority of Minnesota hotels are facing "foreclosure and potential collapse" by summer, a recent survey by Explore Minnesota, Hospitality Minnesota and the Federal Reserve Bank of Minneapolis said.

Overall occupancy rates in Minnesota sank to 36% in 2020 compared with 62% in 2019. Hotels need at least 40% occupancy to break even, said Tanya Pierson, senior managing director of HVS, an international consulting firm serving the hospitality industry.

Pierson said Minnesota hotels located in "destination areas" near lakes or outdoor activities have fared better than those elsewhere. And economy or extended-stay hotels have been affected less than big, high-end hotels with amenities like large meeting spaces, which are more costly to run, she said.

The drop in corporate and group travel has had the biggest impact on Bloomington hotels, Pierson said.

In response, some hotels have turned to unorthodox ways to fill rooms. Three Bloomington hotels signed contracts last year with either Hennepin County or St. Stephen's Human Services, a Minneapolis nonprofit, to house homeless people during COVID-19. Two of the contracts are still in place.

Nationally, Pierson said, she has seen hotels transition into apartments, though that can be a challenge because most hotel rooms are only 350 square feet, a size suitable only for small or studio apartments. Extended-stay hotels transition to apartments more smoothly because they are larger and already have kitchenettes, she said.

At least one Bloomington hotel is exploring different uses. Scott Meyer, president of Kaeding Management Co., which manages the Crowne Plaza Aire hotel in Bloomington, said he and hotel ownership have been "exploring all options for that type of building," including remaining a hotel and converting to apartments — possibly senior housing — or a multipurpose building. They are working with Bloomington officials to see what's possible, he said.

"We got through the first couple of sessions [with the city]," he said. "They didn't give us a 'no.' "

City staff have scheduled more than 200 hours to research conversion options in the coming year. Officials said they have already had a few inquiries from hotels.

City Manager Jamie Verbrugge said the current situation offers the city "an opportunity to reset."

Staff began discussing ways to limit Bloomington's reliance on lodging taxes a couple of years ago, imagining what could happen if the industry took a "significant downturn."

"In those conversations, we never imagined anything like this," Verbrugge said.

Erin Adler • 612-673-1781