The Southland’s Running Out of Room for Rooms : Some Hotels That Identify Special Markets Find There’s Still Opportunity for Growth

The development frenzy that gripped Southern California’s hotel industry through much of the 1980s seems, finally, to be abating.

Torrid office and housing construction, increasing air passenger traffic, Los Angeles’ emergence as a Pacific Basin capital and slack demand for new hotel development in other regions prompted hoteliers to bid for bigger shares of the $20 billion that visitors spend annually in the Southland.

The need for rooms was real. But the response was excessive. In market after market, the ensuing building boom added so many new hotels that occupancy levels and rates fell quickly, and red ink threatened both new and existing properties.

At Los Angeles International and John Wayne airports, in Long Beach, Ontario and Ventura County, the story has been the same: Supply has outstripped demand, creating a buyer’s market of competitive prices and enhanced services.

Yet, even as hotel operators grumble and wary lenders look askance at further hotel investments--threatening the weakest operations with foreclosure--big hotel chains and industry consultants continue to tout the underlying strength of Southern California as a lodging marketplace.

Hotels carefully crafted to meet the needs of ever more demanding travelers can continue to be constructed and operated profitably even as the building cycle winds down, the experts say. But, they add, the hotels must be located at one of a shrinking pool of highly desirable sites and shorn of costly frills more satisfying to developers’ egos than patrons’ sleepy heads.

The prognosis, the experts conclude, is generally good for an industry that employs 92,600 Southern California workers.

“Los Angeles specifically, and Southern California in general, is one of the healthiest hotel markets in the United States and one of the strongest I’ve ever seen,” said Bruce Baltin, a partner in the Los Angeles office of Pannell Kerr Forster, an accounting firm that specializes in the lodging industry. “But it’s absorbed too much supply in too short a period of time.”

Growth in some parts of the Southland has been stunning. In southern Orange County, 12 first-class hotels have been built since 1984, boosting the number of rooms available from 2,450 to 6,450, according to Laventhol & Horwath, another accounting firm that tracks hotel activities.

Occupancy levels at hotels near John Wayne Airport averaged 61.5% last year--down 12 percentage points from two years earlier, according to Laventhol & Horwath. In an industry where a 70% occupancy rate is considered the break-even point, some hotels are operating at occupancies as low as 35%.

“All the developers got in on the wave, and they’re all suffering there,” said hospitality industry consultant David Brudney of Palos Verdes. “They’re all just fighting over the same bone.”

The development boom has included a renovation boomlet as older hotels struggle to compete with spanking new rivals. High land and construction costs have rendered rehabilitation a desirable option for the owners of such hotels as the Beverly Wilshire, the Biltmore and the Los Angeles Hilton.

In 1983, hotelier Max Baril purchased a Holiday Inn on Wilshire Boulevard in Beverly Hills. Four years and $2 million in renovations later, the middle-brow ancestry of the pricey Beverly Pavilion Hotel is undetectable. Occupancy rates have not fully recovered, Baril said, but a well-bred new clientele has been attracted to the hotel and its stylish Colette restaurant.

The heavy borrowing that many rehab jobs require has pushed some properties, however, to the breaking point.

In Irvine, the lender that financed a $25-million refurbishment of the decade-old Registry Hotel filed a foreclosure action earlier this month, saying occupancy rates at the 293-room hotel had fallen recently to as low as 45% recently. A few days earlier, the second-mortgage holder for San Diego’s historic U.S. Grant Hotel--the subject of an $80-million renovation--declared the hotel’s owner in default. Occupancy rates at the Grant have hovered below 60% in a market where occupancies on average exceed 70%.

Even in areas where existing properties are struggling, carefully targeted development is under way or planned. In Southern California’s most popular hotel markets, for example, Marriott and Doubletree are aggressively introducing new lines of stripped down, mid-price lodgings catering to increasingly cost-conscious business travelers.

Marriott this summer opened Courtyard hotels--featuring large guest rooms and moderate prices without the fancy banquet halls, atrium lobbies and bellhops of its classiest properties--near Los Angeles International Airport and in Santa Ana. Compri, a sister company of Doubletree, has also opened a hotel in south Orange County and is finishing construction in El Segundo, near LAX. Each Compri offers complimentary full breakfasts, cocktails, late-night snacks of peanut butter-and-jelly sandwiches and a comfy clubroom as part of a mid-price lodging package.

Both of the new chains are the result of intensive market research--rarities in an industry that traditionally has built hotels of immense cost on the basis of a developer’s intuition and his accountant’s extrapolations.

That tendency produced lavish, full-service hotels that industry experts consider increasingly uncompetitive. Today, though, the focus in Southern California, like in other regions, instead is on homey, economical lodgings that appeal to the frequent traveler.

Harold Parker, chief executive of Warmington Co., brought 20 years’ experience conducting market research for consumer goods manufacturers to the Costa Mesa firm’s development of Hotel Terrace, a six-hotel project off the Costa Mesa Freeway in Santa Ana. Warmington owns two of the hotels, the Quality Suites and Comfort Suites--both mid-price entries that, like two more of the hotels in the development, exemplify another of the key trends in lodging, the all-suite hotel.

Rooms at the Quality Suites cost $74 per night, while the price at the Comfort Suites is $49. Occupancy rates--which industrywide show all-suite hotels registering 10 to 15 percentage points better than their conventional competition--are in the mid-70s for both, according to Parker.

Interviews with patrons indicate that nearly half of the two hotels’ customers are moving down from costlier hotels--proof, Parker said, that hotel developers who identify an under-served market niche can compete even in an overbuilt area like south Orange County.

“A lot of people have been forced to spend more because they did not have enough mid-price choices,” he said.

Yet some of the most popular hotels in Southern California are the most expensive. Analyst Brudney says Laguna Niguel’s Ritz-Carlton--where rates begin at $175 per night--”has got to be one of the most successful hotels in the country.” And the Sultan of Brunei apparently thought it made good business sense early this month to spend a reported $185 million to buy the Beverly Hills Hotel.

Each of Southern California’s regional hubs is a distinct hotel market, and the book on each is a little different. A survey follows:

- Downtown Los Angeles: Baltin of Pannell Kerr says the downtown hotel market is “the healthiest it’s been in a long time,” mainly because the renovations of the Biltmore and the Los Angeles Hilton have made them more competitive. But experts say downtown hotels will have to await the planned expansion of the Los Angeles Convention Center in the early 1990s before they can hope to break out of the doldrums that have mired occupancy rates below 70%.

Still lacking in night life, downtown hotels cannot draw the weekend visitors that spell the difference between profits and losses, Brudney explained: “When Friday afternoon at 4:30 comes, you probably can shoot a cannon off unless there’s a citywide convention.”

- Westside: High land costs and the unavailability of appropriate sites have slowed hotel development in what otherwise is a hotelier’s mecca. Yet a range of hotels--from a low-priced Days Inn to the sure-to-be-tony Ma Maison--are planned, promising to increase the area’s base of rooms by nearly a quarter.

- LAX and the South Bay: With the opening in the last 13 months of Stouffer, Radisson and Marriott Courtyard hotels, 1,600 more rooms have been added in the already glutted airport area. Some analysts say occupancy rates in the area have dropped to as low as 60% from the mid-70% range, and all agree that price-cutting has been rampant, with especially vigorous competition for lucrative contracts to house airline crews.

Among the struggling entries, according to Laventhol partner R. Britton Colbert, is the Los Angeles Airport Hilton & Towers. With 1,279 rooms, it is the largest airport hotel in the nation. But the ownership of the $150-million hotel--part of an office, conference center and retailing complex--has been restructured twice since its opening in 1983. Experts say the hotel’s banquet and meeting rooms are inadequate for a facility its size.

John Elford, the hotel’s general manager, says occupancy rates have risen steadily and currently exceed 70%. Additional meeting space is under study, he said.

- Inland Empire: Ontario International Airport--which expects to serve 4.5 million passengers this year, up from 1.8 million in 1981--is the focus of hotel development on the eastern edge of Greater Los Angeles.

In little more than a year, the opening of Clarion, Hilton, Compri and Residence Inn hotels more than doubled the number of hotel rooms in the airport area, according to Colbert. Strong demand meant occupancy rates fell by only about 12 percentage points in the same period.

Airport Manager Michael DiGirolamo says delays in a planned expansion of the airport terminal have cooled the ardor of developers contemplating further hotel construction in the area. In the longer term, though, hotel expansion is expected to parallel the residential and commercial growth that have made parts of Riverside and San Bernardino counties California’s fastest-growing region.

- Southeastern Los Angeles County: The Interstate 5 corridor is a surprisingly popular lodging market for business travelers, and cities along the freeway are competing for their lodging dollars. Huntington Park, Compton, Norwalk, Cerritos, Pico Rivera and Commerce all have contemplated--or commenced--redevelopment projects that include subsidies for hotel developers.

Cerritos, for instance, has offered a developer $5 million up front and $750,000 annually for 20 years to make a $141-million office and hotel project across from the civic center, according to Michele Ogle, a city spokeswoman. City consultants say the hotel alone would generate $34 million in bed-tax revenue in its first 20 years of operation.

- Long Beach: The re-blossoming of this dowager city spurred a flurry of hotel construction beginning in 1982. Analysts say growing demand--largely created by the marketing activities of the Long Beach Area Convention & Visitors Council--absorbed the supply until this year, when the opening of the airport Marriott and the downtown Ramada Renaissance outstripped the call for hotel rooms.

“It’s a blessing on one hand, because we’ve got more market to sell, and we can book trade shows and conventions for the future,” said Bill Miller, the visitors council president. “But in the meanwhile, we’ve got a short-term problem, where hotel occupancies--which were very, very high--are beginning to fall.”

Disputing Laventhol & Horwath’s rosy projection of an average 79% occupancy rate for the year, Miller said some hotels’ rates have dipped into the 40s and 50s. The visitors council plans to combat the downward blip with a $500,000 marketing campaign aimed at the tourist trade.

- Orange County: The development cycle that made the John Wayne Airport vicinity one of the nation’s biggest hotel growth markets is ending; experts say only the largest developers with the strongest track records will be able to obtain financing anytime soon for further hotel construction.

The Anaheim/Disneyland area, by contrast, has experienced little new development in the last four years. Room prices and occupancy rates, consequently, have risen steadily, though the greatest strength in this price-sensitive tourist market has been in economy lodgings, according to David Kinkade of Laventhol & Horwath’s Costa Mesa office.

- San Diego County: Long one of the nation’s strongest hotel markets, San Diego’s high occupancy levels, rising room prices, expanding business community and planned waterfront convention center have spawned a steady 7% to 10% growth in hotel rooms over the last four years, according to the San Diego Convention & Visitors Bureau.

Downtown San Diego and La Jolla have been the primary beneficiaries of hotel construction, though development extends into North County and Coronado. Delays in the construction of the convention center--now scheduled to open in 1989--have hurt some of the new downtown hotels, including the U.S. Grant and the waterfront Marriott (until recently the Intercontinental), according to Dal Watkins, Convention & Visitors Bureau executive director.

- Ventura County: Commercial activity--the bellwether for hotel success--has not met projections in Ventura County, according to Baltin of Pannell Kerr. A few Santa Barbara hotels are “bright spots,” adds Brudney, but in general the market is “overbuilt” and “struggling,” he said.

BOOM IN SOUTHLAND LODGING INDUSTRY

1984 1985 1986 1987* Downtown Los Angeles Occupancy Level 67% 67% 67% 69% Average Room Rate $78.75 $79.00 $82.00 $85.75 No. of Rooms Available 5,084 4,245 4,270 4,505 Los Angeles Intl. Airport** Occupancy Level NA 70% 72% 70% Average Room Rate NA $64.50 $66.50 $66.50 No. of Rooms Available NA 5,501 6,651 6,651 West Los Angeles** Occupancy Level 70% 65% 71% 73% Average Room Rate $97.00 $99.00 $102.50 $106.50 No. of Rooms Available 3,797 4,137 4,149 4,540 Marina Del Rey/Santa Monica Occupancy Level 81% 79% 77% 80% Average Room Rate $72.25 $78.00 $81.00 $84.25 No. of Rooms Available 1,033 1,551 1,551 1,551 Long Beach Occupancy Level NA 80% 79% 79% Average Room Rate NA $73.00 $75.00 $76.85 No. of Rooms Available NA 1,589 1,964 2,081 West San Fernando Valley Occupancy Level NA 68% 74% 75% Average Room Rate NA $68.50 $74.50 $76.80 No. of Rooms Available NA 736 1,209 1,209 Ontario International Airport Occupancy Level 75% 74% 60% 63% Average Room Rate $44.25 $51.00 $51.00 $53.00 No. of Rooms Available 819 995 2,044 2,044 John Wayne Airport Occupancy Level 74% 65% 62% 65% Average Room Rate $71.60 $73.00 $76.75 $78.50 No. of Rooms Available 2,450 3,650 5,100 6,450 Disneyland/Anaheim Occupancy Level 65% 71% 74% 79% Average Room Rate $65.00 $66.25 $68.00 $69.75 No. of Rooms Available 7,300 7,600 7,600 7,600 San Diego County Occupancy Level 76% 76% 72% 77% Average Room Rate $64.65 $67.41 $70.30 $76.72 No. of Rooms Available 27,730 29,931 31,707 34,567

NA-Not available *-Estimate **-First Class Only

Source: Laventhol & Horwath