HOTEL WAR : Competition for Guests Covers Crowded Battlefield With Fallen Rates, Empty Rooms
The Sheraton Hotel in Newport Beach serves free breakfasts. The Hyatt Regency in Garden Grove upgrades guests’ flights to first class on some airlines. Yet despite the come-ons, there are plenty of empty rooms at the Sheraton, the Hyatt and the rest of Orange County’s 351 hotels and motels.
And that means room rates have remained low as all those hotels compete against each other, particularly along “Afterburner Alley,” the group of hotels clustered around John Wayne Airport.
At the Registry Hotel, for instance, only about half of the rooms on average have been occupied in the last year. Last month, the partnership that owns the Registry Hotel filed for protection from creditors under the federal bankruptcy code.
At a U.S. Bankruptcy Court hearing this week, an attorney for the hotel’s biggest creditor intoned in his best courtroom cadence: “There is a hotel war raging out there in Orange County.”
The Registry has heavy debts and stiff competition from better-known national chains, so its problems are somewhat unusual. But most local hoteliers complain that the competition is forcing them to keep the rates they charge customers unusually low.
Those rates haven’t risen much since 1983, which is fondly remembered as the last really good year for the local lodging industry.
Keeping Up With New Hotels
“Our occupancy has improved in the last year,” said Jeff Morse, general manager of the Sheraton. “But our average room rate has stayed flat, and most of the hotels in Newport Beach aren’t getting the kind of rates they need because they have to keep up with all the new hotels that are discounting rates so dramatically.”
Now, however, there are some indications that these trends have begun to reverse. Only one major Orange County hotel is scheduled to open in 1988--a Marriott all-suites hotel in Newport Beach--contrasted with the three or four hotels that opened in each of the last few years.
Since demand for hotel rooms continues to grow in Orange County’s bustling economy, occupancy levels should start to rise next year, local hotel consultants said. Room rates, too, should begin to appreciate.
“I don’t want to be overly optimistic and say everything is great, because it’s not,” said David R. Kinkade, a hotel consultant at the Costa Mesa office of the accounting firm of Laventhol & Horwath. “But the growth in the supply side has virtually stopped, and that means average occupancy rates should go up.”
The lodging industry tends to move in those kind of cycles as demand for rooms lurches ahead of supply, then catches up and surpasses it. In the last few years, tax incentives made offices, hotels and other buildings attractive to investors. Those incentives have been rescinded by last year’s changes in federal tax law.
And in many markets--including Orange County--lenders are becoming less likely to part with their cash as the number of empty hotel rooms has burgeoned.
“Three years ago a lender would finance 100% of a hotel,” Kinkade said. “Now they want the developer to put up 25% in equity. And most lenders tend to act in concert with all the others.”
During the first nine months of 1987, hotel occupancy rates for the county averaged 73%, up slightly from 70.1% last year, according to Pannell Kerr Forster, an accounting firm and hotel consultant.
Average room rates also rose slightly, according to the firm, to $67.80 a night from $66.65. Average room rates are what the hotels actually collect for each room after corporate and group discounts, rather than the regular rate advertised to the public.
“The room rates are starting to pop, but only with a small ‘p,’ ” said Jim Burba, a partner in the Pannell Kerr Forster’s Newport Beach office.
Some hotel executives, however, will believe that when they see it. Jay Oxford, general manager of the Hilton Hotel in Irvine, describes this year’s business as only “moderate” and sees more of the same for 1988.
“Our projections are that next year will be about the same as this year,” he said.
The Anaheim area remains the healthiest hotel market in the county, according to Pannell Kerr Forster’s figures, with a 77.3% occupancy rate, up from 73.9% last year. Still, room rates rose only by about a dollar in that time, from $65.50 to $66.60.
And in the airport and Newport Beach area, where the occupancy rate was just 66.5%, average room rates went down a dollar during the year, to $72.19 a night.
Still, things could be worse, even around the airport. The county’s economy remains strong, and demand for hotel rooms continues to grow, even if it has not kept pace with hotel construction.
Although occupancy rates for county hotels are at or near a 10-year low, they are at about the national average for the hotel industry. That average has been dragged down by abysmal showings in the oil states of the Southwest and the farm states of the Midwest.
And while there are plans in various stages for all sorts of new hotels in the county, particularly in the Anaheim area, there is also skepticism about whether all of them will eventually be built.
“I think you’ll see a lot more buying and selling of existing hotels,” said Jerry Lewin, general manager of the Hyatt in Garden Grove, “rather than a lot of new hotels.”
AVERAGE DAILY RATE--ORANGE COUNTY 1983 $63.00 1984 62.50 1985 62.00 1986 66.00 (1) 1987 (est) 67.50 (1) Rate growth is partially attributed to new hotel openings at higher average room rates and not necessarily reflective of even growth in individual hotel average room rates Source: Panell Kerr Forster
