Orange County Luxury Hotels Gird for Battle

There is a tastefully quaint room next to the vault at the Ritz-Carlton in Laguna Niguel where hotel guests can be alone with their money. When they look up from their safe-deposit boxes, they see themselves in an antique mirror encircled by rich mahogany walls. It is a splendid place not just for counting money but also for counting blessings.

Not everyone is blessed with the wherewithal to stay at the $100-million Ritz-Carlton, where rooms cost as much as $1,200 a day. For that, guests get fresh roses on their nightstands, English bone china under their crumpets and white gloves on their doormen.

Said one Washington-based sales manager before recently diving into one of the Ritz-Carlton’s two swimming pools, “I’m probably the first person to use either of the pools in two weeks. But who cares? The elegance of this place is titillating.”

Behind such elegant scenes, luxury hotels are preparing to slug it out for business. About 32 new hotels--most of them upscale--are being planned for Orange County, where first-class quarters have been evolving over the past two years at a hotel-a-month pace.

Orange County is being closely watched by the nation’s hoteliers. And, as a test to determine the depth of Orange County’s luxury hotel market, no hotel is being eyed more closely than the Ritz-Carlton, which, despite its rich appearance, is troubled by low occupancy rates and problems with creditors.

Overestimated Market

Developers may have overestimated the size of the luxury hotel market not only in Orange County, but also nationwide, analysts say. The number of first-class hotel rooms in the United States climbed more than 10% last year, nearly twice the growth rate of mid-range rooms. Of the estimated 2 million hotel rooms nationwide, more than 700,000 are now in the upper end.

Some industry analysts wonder whether the expansive luxury hotel growth won’t die sooner than later. In major cities such as Los Angeles, San Francisco, New Orleans and Houston, an overabundance of first-class rooms has recently forced owners to slash rates or offer other incentives to lure customers.

- The Westin Bonaventure in downtown Los Angeles shaved 23% off the price of many rooms last week, prompting speculation that other hotels there might follow suit.

- The Ramada Renaissance Hotel in San Francisco will guarantee a room rate of $95 next year to guests who pay full fare--up to $150 per night--for a room this year.

- The Hotel Intercontinental in New Orleans is offering summer discounts of more than 60% on many single rooms, including weekend rates as low as $55 on rooms that normally cost up to $140 per night.

- The Hotel Meridien in Houston has a discount program in the works that will offer convention groups one free room for every 50 rooms booked.

Orange County’s luxury hotels are offering similar price breaks, hotel executives say. Although a post-Olympics tourism surge and Disneyland’s 30th birthday celebration have helped fill Anaheim-area hotel rooms this year, hotel executives acknowledge that the emerging hotel glut could send them back into the doldrums before next summer.

The specter of falling occupancy rates has caused some aggressive hotel companies to curtail development plans.

Even Marriott Corp., which has built nearly 2,000 first-class hotel rooms in Orange County in the last five years, has no plans to add any more. “The area won’t sustain it,” said J. W. Marriott Jr., president and chief executive.

“You can’t continue to build first-class hotels at the rate we’re building in this area,” said David R. Kinkade, a consultant at the Costa Mesa office of Laventhol & Horwath, an accounting firm.

Rush of Development

Mark Kallenberger, manager of the consulting division of Pannell Kerr Forster’s Newport Beach office, says Orange County is seeing an “excess of demand” resulting in a “rush of upscale hotel development.”

The catalyst for recent sharp growth in Southern California was the 1984 Summer Olympics. Wanting to cash in, a number of major hotel developers in the early 1980s ordered studies of the county’s growth picture. They found that Orange County was about to undergo a boom in office development and that the area’s lodging would not be enough to accommodate the transformation into a major business center.

These changes were a long time coming--especially in Orange County. Disneyland is still a draw, but no longer do the county’s major hotels rely exclusively on the famous theme park to fill their rooms. Many of the county’s overnight guests don’t even see the Magic Kingdom. And some of the finer hostelries actually frown on guests waltzing through their lobbies wearing Mickey Mouse ears.

As recently as 10 years ago, most visitors had to look outside Orange County for a first-class hotel. Today there are more than 9,000 so-called first-class rooms at hotels that pamper guests with everything from in-room swimming pools to monogrammed bathrobes dangling from satin hangers in their closets. That is nearly twice the number that existed five years ago. An additional 5,000 first-class rooms are in the building or planning stage.

The Orange County sightseer who used to pack his family into the station wagon and pull into the local Motel 6 is fast being replaced by the executive who jets into John Wayne Airport and is whisked to his hotel room in a stretch limousine. Moreover, 1 million visitors are expected to attend conventions in Orange County this year.

Eyeing Yuppies

“As long as expense accounts stay alive and well, you’ll continue to see more of these hotels,” said Madeline Schneider, editor of Hotel & Restaurants International, a Chicago-based industry trade magazine. Expense accounts aside, developers are also eyeing well-to-do yuppies who will soon be entering their prime wage-earning years. “The clean room and clean bed isn’t enough for them. They’ll pay $250 for a room, but they expect to get their money’s worth,” said Michael H. Redlin, associate professor at the school of hotel administration at Cornell University.

Today, it is almost impossible to find a major office building development in Orange County without a luxury hotel in its midst. Office space in the John Wayne Airport area, which totaled about 7 million square feet in 1980, could more than double within five years from the current 12.5 million square feet, according to a study by Coldwell Banker. The corporate occupants of these offices are demanding top-notch lodging for their guests.

The area near John Wayne Airport has seen occupancy rates slide for four years, to an estimated 74% in 1984 from 80% in 1981, according to a study by Laventhol & Horwath.

A similar lodging boom exists around Los Angeles International Airport. Four major hotels have risen there in the last two years, including a 1,281-room Hilton, which on average has nearly 40% of its rooms empty.

Top Chains Lured

With Orange County evolving as a high-tech business center, more top-quality hotel chains are being lured to a county that 20 years ago had 2,000 hotel rooms and today has upwards of 35,000. In just two years, the number of hotel rooms has increased 92% in the upscale areas of Newport Beach, Irvine, Costa Mesa and Laguna Beach.

The notable exception to the pairing of offices and lodgings is the 394-room Ritz-Carlton, which prides itself on being its own drawing card.

Besides the Ritz-Carlton, two other ultra-luxury hotels are on tap: a $60-million Four Seasons Hotel being built by the Irvine Co. at Newport Center, and a hotel to be built soon not far from the 363-room Westin South Coast Plaza Hotel by C. J. Segerstrom & Sons.

But Antoine Vanacore, general manager of the new, $55-million Meridien Hotel in Newport Beach, wonders whether the area can sustain such growth. Losses at his hotel were tremendous during its first two months last winter when 80% of its rooms sat empty. “It could be three years before we’re profitable,” Vanacore said.

To rise above the expected tough competition in the Palm Springs market, Marriott Corp. plans a new twist for a $100-million resort it is building in Palm Desert. The hotel will take arriving guests to their rooms via gondola in a lake that Marriott is trenching through the lobby.

“That sounds like an amusement park,” sniffs George Brown IV, president of W. B. Johnson Properties, the Atlanta-based development company that has built a half-dozen Ritz-Carltons. “Maybe they’ve also got a ride that will turn the guests upside down and shake the money out of their pockets.”

Trouble Is Brewing

But trouble is brewing in Brown’s own domain. Contractors complain that the Ritz-Carlton’s parent company--which has multimillion-dollar hotel projects on the drawing board for downtown Los Angeles and Marina del Rey--has been lax in paying millions of dollars in construction bills. John Stephens, executive vice president of Stolte Inc., the Los Angeles-based general contractor of the Laguna Niguel Ritz-Carlton, says that Johnson Properties “got a little piece” of more than a dozen subcontractors, by taking nearly a year to pay construction debts of nearly $8.5 million. “That’s a lot of money they collected interest on,” Stephens said.

More than $1.5 million is still owed to Stolte and two subcontractors, Stephens said.

Ritz-Carlton owners contend that they were simply over-billed for construction work and are sorting out legitimate claims. The project, they note, shifted gears in mid-course from a fine hotel that was to be called Monarch to the ultra-chic Ritz-Carlton, something akin to converting a Cadillac into a Rolls-Royce. Many new materials, such as 80 tons of imported marble, had to be ordered. “If you received improper billing for something you ordered, wouldn’t you want to try to correct it?” Brown asked.

Still, it may take some time before the hotel becomes a profit center. Although occupancy rates exceeded 80% in February--aided by unusually high business conference traffic and harsh East Coast winter weather--that was not the case last summer when the hotel was hard-pressed to fill even half its rooms, said general manager William A. Hall.

Institutions Involved

The harsh economics of building massive, first-class hotels have placed a growing number of them in the hands of those looking for longer-term pay-backs, such as insurance giants or cash-rich pension funds.

In late February, 90% of the Ritz-Carlton was sold to Prudential Insurance Co. of America. Johnson Property executives insist that the sale was not prompted by the suits or a need for refinancing, but is simply part of the company’s history of forming joint ventures.

Economics aside, lodging experts contend that the Ritz-Carlton brings a new dimension to Orange County hotels. “You’ve got to give them credit,” said Melinda Bush, publisher of New York-based Hotel and Travel Index, “The Ritz-Carlton adds a certain ambiance to Orange County that it never had before.”

It has also spurred on the competition. The county’s original resort, the 23-year-old Newporter, has spent $12 million sprucing up over the last three years, and its new owners promise to pump in an additional $5 million.

But the amenities that give a hotel luxury status are not all guests’ cup of tea. When Terry Feist arrived at the Ritz-Carlton from San Francisco earlier this month, he was tired. An overly amiable bellman insisted on showing him the hotel’s layout, so Feist, a regional manager for Schweppes U.S.A. Ltd., grudgingly went along. But, he said, “I’d rather have just taken the key and gone to my room.”

Lures Sightseers

The novelty of a Ritz-Carlton in Orange County is still attracting hordes of curious sightseers. Some come for the Sunday brunch only to discover there is a three-month waiting list for non-registered guests. Some just want to see if they can break the rules, such as the one that requires men to wear jackets after 6 p.m.

At the Ritz-Carlton, however, most guests would wear the jackets anyways. “There is good reason for building more luxury hotels,” said publisher Bush. “They give society a place to hold its parties.”

AVERAGE DAILY OCCUPANCY RATES OF SOUTHLAND HOTELS Los Angeles Downtown

1974 ’75 ’76 ’77 ’78 ’79 ’80 ’81 ’82 ’83 53.3% 55.2% 61.1% 61.4% 65.2% 73.4% 73.0% 69.1% 59.6% 56.9%

1974 ’84 53.3% 58.7%

LAX area

1974 ’75 ’76 ’77 ’78 ’79 ’80 ’81 ’82 ’83 69.2 66.4 72.6 79.2 86.5 89.8 85.7 79.2 78.0 82.3

1974 ’84 69.2 72.5

L.A. County

1974 ’75 ’76 ’77 ’78 ’79 ’80 ’81 ’82 ’83 65.7 64.2 70.5 73.5 77.6 81.3 78.3 75.0 76.7 69.7

1974 ’84 65.7 68.0

Orange County

1974 ’75 ’76 ’77 ’78 ’79 ’80 ’81 ’82 ’83 74.7 73.8 76.0 80.2 80.0 77.6 76.3 75.3 *73.0 71.4

1974 ’84 74.7 66.7

* Estimated Source: Pannell Kerr Forster