Report Says Area Hotel Growth Still Tops Demand
One of the nation’s leading hotel industry consultants predicts that 1987 will mark the second year in a row that growth in the Southeast area’s hotel rooms outpaces demand.
The consulting firm, Pannell Kerr Forster, also found that last year the average price of a hotel room in the Southeast Los Angeles County went down more than $2.
The conclusions come at a time when area cities have been scrambling to lure more hotels to their communities and developers have proposed six additional first-class hotels. Construction of a 300-room hotel and convention center is under way in Compton; Cerritos and Huntington Park have signed development agreements for hotels, and proposals are on the table in Norwalk, Pico Rivera and Commerce.
“Any additions to the supply had better be well-conditioned and well-placed,” commented James Burba, a partner in the Houston-based consulting firm that studies the market annually.
Owners and operators of some of the area’s new first-class hotels say their experience confirms the findings. At the same time, proprietors of some of the area’s older hotels say their business has dropped as new competition has moved into the area, suggesting that hotels are trading customers, and not, as some had hoped, generating them.
Rates Halved on Weekends
Some operators admit that they are cutting rates to attract low-budget tour groups. One hotelier, who asked not to be identified, said that on weekends, when business is poor for most local hotels, he rents $70 rooms for $35 in order to boost his occupancy rates. “We all do it,” he said.
Pannell Kerr Forster found that the average room rent has dropped in the Southeast area from $55.13 for the first eight months of 1985 to $52.80 for the same period of 1986.
A second study on occupancy, which includes responses from virtually every operating hotel and motel in California, showed that average Southeast area occupancies will dip to 66.9% next year, down from 70.1% in 1985. The state’s projected average occupancy for 1987 is also 66.9%, down from 67.9% in 1985.
Operators here say they have to achieve occupancy rates of 70% or more to break even, although the number can vary depending on the hotel’s mortgage payment. Operators of the Embassy Suites in Downey say they are achieving about 75% occupancy. Industry analysts attribute the success to the hotel’s all-suite format.
Last week, the year-old Whittier Hilton Hotel, which needs about 72% occupancy to break even, had about 60%, said Kitty Dyer, chief executive officer. But, she said, one recent evening was a sellout. “Our trend lines are definitely up,” Dyer said.
Steve Robbins, general manager of the Whittier Hilton, said during the fourth quarter of 1986, occupancy ran just under 50%. Room rates, he said, averaged about $65 during the year.
Owners of the 300-room Holiday Inn in La Mirada declined to state their occupancy rate. “We are making a slight profit, after debt service,” said Lewis Wolff, managing partner. “I’m not crying, but no one would go with the investment we made for the return we are getting today.”
Prices Rising in Long Beach
In the Long Beach area, the news is better in the consultants’ statewide forecast. Rooms are coming on the market faster than they can be filled, but room prices are going up, and the number of people staying in area hotels has increased sharply.
“In a market like Long Beach, demand frequently follows supply,” Burba said. “The potential there is strong for capture of the business, the meeting and the tourist market.”
Despite the lackluster forecast, cities north of Long Beach are forging ahead with their attempts to lure hotels with promises of operating subsidies and rights to develop other buildings alongside the hotel.
In every city with a hotel project, officials say they are subsidizing it, or would be willing to. Cerritos’ Redevelopment Agency, for example, is making a $5-million, interest-free loan to Transpacific Development and agreed to pay hotel operators a $750,000 annual subsidy for 20 years, or until the hotel becomes profitable.
“We think the project will succeed because we’ve got a distinctive product, we’re creating the market (by building nearby office buildings), and we’ve got the subsidies from the agency,” said Steven Schafenacker, Transpacific’s project manager for the Cerritos Towne Center.
Developers and city officials in Cerritos and Norwalk, where a Hilton is proposed, say their hotels are being built at the behest of city councils as required centerpieces of larger projects. In Cerritos, the carrot for developing a 200-room hotel is the right to surround it with a million square feet of office space. In Norwalk, the 200-room Hilton would be part of a $60-million commercial and residential project.
City Support Called Positive
One analyst sees the cities’ aggressive support of hotels as a positive trend. “It’s like any other effort by a city to be pro-active instead of reactive,” said Lauren Schlau, manager of management advisory services for the Los Angeles office of Pannell Kerr Forster. “I see the hotels as a significant, visible sign that somebody is taking ahold of these communities.”
Schlau said demand for first-class hotels may increase as industrial businesses move out of the area and high technology moves in, as evidenced by the closure of Ford Motor Co. in Pico Rivera, and the opening of Northrop Corp. on the same site. But whether the market will expand enough to absorb the new first-class hotel rooms is uncertain.
Schlau said other studies indicate that demand for lower-priced hotels remains strong.
In that regard, Bell Garden’s experience may be the harbinger: plans there to build a splashy, 150- to 200-room Las Vegas-style hotel have fallen through because of a discouraging feasibility study by Pannell Kerr Forster.
The study showed that the first-class hotel, which was supposed to go next to the Southeast area’s most successful card club, was not situated well enough to attract commercial accounts, and that the card club alone could not be counted on to sustain it. Now, after 18 months, city officials have reopened talks with developers who have proposed a 107-room economy hotel in the same vicinity.
Pannell Kerr Forster has also returned city-commissioned studies with guarded outlooks to Norwalk and Commerce. After reviewing the study of the supply and demand for hotel rooms in Norwalk, a citizens committee recommended that the City Council proceed quickly on plans to build a Hilton in order to beat the competition.
“It’s a race” said William H. Nevius, assistant director of Norwalk’s Redevelopment Agency. “More hotels are proposed in the Southeast corridor than the market can absorb.”
The Commerce study warned that a hotel at the abandoned Uniroyal plant would succeed only if accompanied by an attraction such as an exhibit center. The City Council opted to advertise for other projects instead, and three of the five proposals submitted include hotels, said Ira Gwin, community development director.
Tax Revenues, Jobs Wanted
Gwin and others cite tax money, job opportunities, service to the community and prestige to explain their efforts to lure hotel developers. A place to house out-of-town visitors, space for dressy civic functions, an upscale identity--it is a fantasy that area city councils have found difficult to let go of, even when costs run into the millions.
“When I want to impress a banker, I take them to lunch at the (Downey) Embassy Suites,” said James G. Funk, Huntington Park director of community development. “Once our hotel opens, I won’t have to do that.”
The Pannell Kerr Forster report lumps Long Beach in with coastal cities as far north as Manhattan Beach, and includes the Southeast area in a category bounded on the north by Pasadena, on the south by Lakewood, on the east by Pomona and on the west by Compton.
Analysts say that while the market area for each proposed hotel must be considered separately, Long Beach and the Southeast area are not atypical of the overall findings.
