JIM BURBA : Checking Out the Hotel Lobby : Without Reservations, Industry Sees Room for Concern
Most people don’t think much about hotels until it’s time to find a cheap place to stay in Tucson while visiting Aunt Tillie. But Jim Burba thinks about hotels all the time.
There’s been a lot to think about. When Orange County’s growth boom began in the 1970s and 1980s, the hotel chains and developers began to take notice of what had been, until then, pretty much a hotel backwater, with the exception of Anaheim and Disneyland.
Soon everybody was building hotels around John Wayne Airport, the suburban county’s new “downtown.” By the late 1980s the inevitable happened: There were too many hotels. Occupancy rates fell and room rates stayed frozen as a politician’s smile.
Now the hotel market should be improving. Few new hotels have been built around the airport in the last few years. But it hasn’t improved. Instead, business travelers seem to be making a lot fewer trips lately than everyone had expected, possibly as a result of tough times in the defense industry.
So these are the times that try hoteliers’ souls, and the times when people like Burba are often busiest. As senior principal in the Orange County office of accounting firm Pannell Kerr Forster, Burba advises the hotel industry on matters such as market conditions and whether a deal to acquire or build a hotel makes sense.
With seven people in the Irvine office, PKF--as its employees call it--says it’s the biggest hotel consultant in Orange County.
Burba, 35, has been with the firm off and on since graduating from UCLA in 1978. He has been in the Orange County office for four years.
In this conversation with Times staff writer Michael Flagg, he talks about what’s up in the local hotel market and what’s ahead.
Q. What’s behind this recent hotel construction boom and when did it start?
A. It started in the early 1980s because in Orange County, as in many California markets, hotel occupancy rates and room rates were strong. There was a lot of money available from financial institutions to build and there were significant federal tax breaks available. And you had some very aggressive hotel chains looking to expand, all of which made it easy to bring a hotel deal together.
Q. How long did it go on?
A. Through the mid-1980s in most markets and even a little beyond in some. A lot of the hotels that opened then were conceived in ’80 or ’81 and then had to go through the local planning commission, the financing process and construction, and didn’t open until, say, 1984.
Q. All those circumstances have changed significantly, haven’t they?
A. Yes. For one thing, we had very strong inflation expectations in the early 1980s. If you’ll remember, that was the era of double-digit inflation. If you used a 10% or 12% inflation rate on a set of financial projections and you had a fixed-rate loan from a bank, all of a sudden your income and expenses start to go up and your loan doesn’t. So you should have a lot of money available to service the debt and pay the owners. The inflation expectations in 1981, when a lot of the hotels in this market were conceived, were for about 8% compounded average annual inflation through the decade.
Q. And it turned out to be . . .
A. About 4% on average. So if somebody decided to build a hotel in 1981 and thought his average room rate would be $100 today, it’s probably about $70. But that was everybody’s best call 10 years ago. And a lot of real estate deals were done on that basis.
Q. This was more than an Orange County phenomenon, wasn’t it?
A. Definitely. Although Orange County probably saw some more velocity in the number of rooms coming in, particularly in the John Wayne Airport area. That’s because it was a booming suburb of Los Angeles and a lot of office space was coming here.
Q. In light of tax reform, which made many real estate investments less attractive, and the lower rate of inflation, how good an investment are hotels these days?
A. Hotels can be a good investment, depending on how much you owe, how much you invested and the type of market it’s in. A lot of the existing ones, though, are not good investments because occupancy rates haven’t come up to the level they need to be to make the owner a decent return. And new hotels are difficult too, partly because financing has all but dried up. Then there aren’t a lot of markets that can absorb too many new hotel rooms.
Q. Is there more buying or building going on in Orange County these days?
A. There’s probably more buying going on these days. There were only eight or nine hotels built last year and there were probably more sales than that. That’s probably typical for most markets around the country: There are, for instance, markets where no hotels are being built at all. We still have a few small all-suite hotels coming into our marketplace because there are still pockets where a deal makes sense.
Q. Such as?
A. Anaheim, perhaps; Irvine Spectrum (a large business park in Irvine at the San Diego and Santa Ana freeways), places where there’s still some demand and not a lot of hotels. Certainly the coastal hotels can make sense. The airport area, though, is probably a few years away from being ready for more hotels.
Q. Who’s buying hotels these days?
A. The obvious answer, just based on what we read and hear, is foreign investors. There have certainly been a variety of transactions in Orange County involving the Japanese and other Asian investors. And some domestic investors have bought hotels. Probably the majority, though, have been foreign. And that’s probably true of the rest of Southern California as well.
Q. So the Japanese are buying not only the big splashy hotels like the Dana Point Resort but littler ones as well?
A. Yes.
Q. What was the market like before the 1980s construction boom, when the county was less of a power economically?
A. The Disneyland market has been a decent-sized and fairly strong market for a long time. The airport market only had a handful of hotels back in the late 1970s and they performed at high occupancy and high rates. It was a supply-demand imbalance in the other direction, a direction we’re not much used to seeing today. And then that all changed.
Q. Hotel customers have changed a lot too, haven’t they, with far more business travelers now that the county has developed its own economic base?
A. Well, you have to make a distinction among the markets. At John Wayne Airport, 55% of the business is commercial, 15% tourist and about 30% group meetings. In Anaheim, which is about the same size market, only about 5% of the business is commercial, 25% tourist, 35% tourist groups, 20% group meetings and 15% conventions. Those are the two big markets in the county. They represent about 75% of all hotel rooms. Obviously the coastal hotels from Dana Point to Huntington Beach are almost all tourism and meetings. And the hotels in Buena Park and Fullerton off the Riverside Freeway are heavily commercial, much like John Wayne Airport. Those are the other two major clusters of hotels.
Q. Is that a strong mix of customers?
A. The airport market is probably just a little more focused on group meetings than you’d expect in a commercial market. With about a third of their business from meetings, the hotels have had to go out and work real hard to fill rooms. They have been pulling meetings into this area from a wider area than usual. There aren’t a lot of commercial hotel markets in Los Angeles, for instance, that have a third of their business in meetings.
Q. Will the expansion of flights and new terminal at John Wayne Airport boost business much, as the hoteliers hope so fervently?
A. The expected traffic is supposed to go from 4.5 million passengers to 8.5 million over a period of time, so it should help quite a bit. The second thing airport expansion hopefully will do--and this is a critical issue for the hotel industry--is make John Wayne Airport less expensive to fly into, because it is very expensive now.
Q. How much does that hurt the hotel business?
A. A lot. If you’re a group meeting planner and you’re moving 30 people into this market, you may negotiate real hard to get good rates on a hotel, on your banquet and other functions, and whatever tourist attractions you’re putting in the package. And then you look at your airline prices and find they’re 50% higher than Los Angeles. That may well cause you to not come here.
Q. Speaking of getting people in here, how far are the hotels willing to go and what’s it costing them?
A. They’re being very competitive in room rates. It’s evidenced by the fact that room rates in the airport area have not kept pace with inflation over the last five or six years. Getting customers into a hotel here can often come at the sacrifice of price.
Q. The industry has developed all these different types of hotels in the last few years, like the all-suites hotels. Does the local market represent most of these types, or is it different from the average?
A. Orange County is one of the nation’s leading markets--probably the second-largest in terms of its percentage of total rooms--in all-suite hotels. The only market in the world that has more is Phoenix, because that’s where Embassy Suites first started. Something like 11% of our market is all-suite hotels. The national average is probably 3.5%.
Q. Why so high?
A. A couple of reasons. The market here took off and grew at a time when all-suites were becoming a hot concept. And Bob Warmington, the Orange County home builder, also conceived of an idea which eventually became the Quality Suites and Comfort Suites concept, and there were several hotels built here in the mid-1980s as prototypes. It got a lot of people interested in this as a market for all-suite hotels. The vast majority of hotels that have opened in Orange County in the last four years have been all-suite.
Q. How have they done? I seem to recall reading that they’ve generally not done very well nationally.
A. That’s not true. In Orange County, all-suite hotels have basically paralleled the other hotels. Last year all-suite hotels were at 69% occupancy while all the hotels in the county averaged 68%. Average room rates were $4 to $5 stronger than the county average, $77 for all-suite versus $72 a night. So there’s an advantage to being an all-suite hotel.
Q. What about the national market?
A. Nationwide the numbers are even better than here, but that’s because Orange County has such a large number of all-suite hotels competing against each other.
Q. So we can expect to see more of them?
A. It’s less than a 10-year-old trend, so will it be with us in the 21st Century? Probably. Will it continue to grow at the same geometric speed? I would guess not. But it’s still the lion’s share of new hotels in Southern California these days.
Q. In general, how strong is the Orange County hotel market compared to the rest of the nation?
A. Orange County is operating at right about the national average, 68%. Interestingly, an occupancy rate in the mid-- to high-60% range is not that uncommon for the hotel industry over the last 20 to 30 years. The reason people say the industry is in some difficulty today is that there’s a lot of product out there that was over-invested based on the inflation expectations of the early 1980s and the expectations of tax writeoffs. Look at it this way: For Orange County to stay in the mid-60% range of occupancy with the onslaught of new rooms over the last couple years is quite commendable. But where the market has suffered is in not being able to meet expectations for room rates. That’s why I’d prefer to use the word “over-invested” rather than “overbuilt” in describing this market.
Q. We’ve talked about how there’s no real rule of thumb for an average occupancy rate at which a hotel breaks even. But isn’t there a fairly valid rule concerning how much a hotel must charge for a room based on its construction cost?
A. Yes, it’s $1 in average room rate for every $1,000 a room cost to build. Therefore, if a hotel can get a rate of $65 a night, you ought to be able to spend around $65,000 a room to develop it. Those rules are generally valid today.
Q. What’s it cost to build a new hotel room in this market?
A. It depends on your definition of hotel room. If you were to build a full-service hotel near the airport, for example, to buy the land and develop the hotel would cost you more than $100,000 a room, which would suggest you’d better be near $100 a night per room to make it work. There are hotels over there (near John Wayne Airport) that do $100 a night, so it is plausible.
Q. What is the average room rate near the airport these days?
A. The latest figures show it’s about $77.
Q. One hears there are a lot of people still contemplating constructing a hotel in the county, perhaps after the market improves a little. Do you anticipate another wave of hotel building in a couple of years?
A. There are people who are still interested in being in Orange County and who are in various stages of planning. But it’s not a lot when compared to three or four years ago. What happens depends on how quickly the market rebounds. The market needs to get strong again and the financial institutions that loan to the industry have to feel good about it, especially in light of the savings and loan crisis. There’s not a lot of enthusiasm for lending on commercial real estate, especially a complex type of commercial real estate like a hotel.
Q. What chains are well-represented here, and which have yet to come in?
A. Marriott is probably the best-represented chain; they’ve got a big hotel in Anaheim and several in the airport area. Hilton probably is next. Then it drops down to a variety of other people. Who’s not in the market? Omni is not here, Stouffer is not here.
Q. Do you think they’d like to be here? Have they looked?
A. I think all the chains consider this market a place they’d like to be. I couldn’t say for sure about everyone, but almost every chain has looked at the market. It’s a major metropolitan area with strong growth. On the other hand, you have the traffic and the smog.
Q. A lot of hotels are built by developers next door to their office buildings as an inducement for tenants to lease offices. Will that continue?
A. That’ll continue, but the hotel has got to make sense on its own. It certainly adds to the allure of a mixed-use development to have a hotel integrated into it. But I’m not so sure banks and investors are going to look at it the same way as they did a few years back, that it might be there as a loss leader until the market catches up.
Q. Most of the hotels here, I assume, are owned by someone else and merely franchised or managed by the hotel chain?
A. Yes, although Marriott tends to own a lot of real estate, there are very few hotels actually owned by the chains themselves.
Q. How profitable is food and drink?
A. Most hotel operators aren’t as efficient as free-standing restaurant chains. And beverage sales have been steadily declining over the last 10 years because people are drinking less due to concerns about health and fitness.
Q. What’s the outlook for the local hotel market?
A. Barring a recession--and I think that in itself is a big question in a lot of people’s minds--you would see the market in the airport area slowly, steadily improving. There should be growth in room rates that is at least consistent with inflation and maybe a little more. Anaheim is a lot healthier and there’s more interest in building hotels there.
Q. And there’s another big problem that has nothing to do with the market, isn’t there?
A. Yes. The 1990s are going to be difficult for the hotel industry because of shifting demographics. Six years from today there’ll be something like 5 or 6 million fewer people between the ages of 18 and 34. Those people are the backbone of hotel staffs, because hotel jobs are usually low-wage and are often a person’s first job in the marketplace. There are hotels in the Coachella Valley right now that have to ship employees in from their Orange County hotels because they’re short-staffed. And, of course, finding a place to live in Orange County on hotel wages is not easy. It’s not a crisis in Orange County today, but it’s not going to get any better either.
