REGIONAL REPORT : Heartbreak in Hotel Industry : Projects That Were Launched Before Recession to Be on Line Soon, Adding to Southland Glut
Bankruptcies, foreclosures and other signs of a brutal shakeout among Southern California hotels are popping up all over, as the problem of too much room at the inn is compounded by competition from dozens of newly opened hostelries.
News this week that the Westin Bonaventure, Los Angeles’ biggest downtown hotel, faces foreclosure, is only the latest example. The 114-room L’Ermitage in Beverly Hills is due for foreclosure next month. In Orange County, the 485-room Irvine Marriott is just one of about a dozen big hotels in bankruptcy proceedings.
And in San Diego, where a six-year building boom flooded the market with 10,000 new hotel rooms, construction has been halted on half-built projects such as the 444-room Aviara Four Seasons resort complex in Carlsbad.
Nevertheless, even more hotels started during the boom years of the 1980s are due to open soon, including the 450-room Intercontinental Hotel near 2nd Street and Grand Avenue in downtown Los Angeles. Hotel executives say this presages cutthroat competition for an industry already reeling from the recession and a drop-off in travel.
New hotels started in the mid- to late 80s before the recession hit, many with Japanese backing, “have cannibalized the profits of their neighbors down the street,” said Donald W. Wise, a hotel expert with C. B. Commercial Real Estate Group in Anaheim.
According to a new survey by the consulting firm Arthur Andersen Real Estate Services Group, the Los Angeles area will add 39% more hotel rooms this year than in 1990. San Bernardino and Riverside will add 19% more, and San Diego will add a whopping 55%. By contrast, the Andersen survey of 25 major metropolitan areas in the United States found that addition of new hotel rooms will be down by 44% on average this year compared to 1990.
Downtown Los Angeles has a special problem: Completion of a desperately needed source of new business, the new 681,000-square-foot Convention Center, has been pushed back by more than two years to 1993. Los Angeles has only about 35 major conventions booked through 1994, compared to more than 200 booked in Anaheim.
Experts say new hotels generally must maintain an average yearly occupancy rate of about 65% just to be profitable. Scott Smith, of the accounting and consulting firm Pannell Kerr Forster, says a healthy hotel market is indicated by occupancy rates of 73% to 75%.
But current figures are falling far below that. Occupancy in downtown Los Angeles hotels is running under 60% this year. In Orange County, occupancy has fallen to 64% this year from 68% in 1990.
In San Diego, a mini-boom earlier this year, brought mainly by Navy personnel returning from the Gulf War and their families, has now faded. Current figures show that occupancy is about 65%, about even with last year’s anemic rate and well down from 74.9% in 1989.
“L.A., like most other cities, is overbuilt, and I don’t think that new hotel projects are feasible,” said Colgate Holmes, chairman of the company that runs the Biltmore.
Few developers seem to heed the warnings, however.
In San Diego, the 431-room Pan Pacific opened earlier this year and the 450-room Loew’s Coronado Hotel, is set to open next month. In Orange County, a 150-room Marriott and a 122-room hotel opened in Fountain Valley in March. The 124-room Woodfin Suites in Cypress opened in 1991 and the Radisson Suites, with 122 rooms, is under construction in Santa Ana.
Besides the Intercontinental in downtown Los Angeles, Mitsui Fudosan U.S.A. is scheduled to build a 390-room hotel at Figueroa and Eighth streets downtown. Further west, a 304-room Nikko Hotel will open in Beverly Hills in December and the 190-room Park Hyatt is 75% complete in Santa Monica.
Some hotels have begun to cut rates aggressively to attract guests, a trend that will add to the industry’s financial woes. “The possibility of more foreclosures wouldn’t surprise me,” said Michael G. Mueller, a managing director at Montgomery Securities investment house in San Francisco. “We are in an overbuilt situation. Banks are unwilling to lend more money on hotels, and foreign financing has dried up as well.”
Tokyo-based Maruko Inc., which was planning to build a 180-room hotel at Los Angeles airport and which had acquired nearly a dozen U.S. hotels including the 340-room Hollywood Roosevelt and the 234-room Maruko Hotel in San Bernardino, filed for protection from creditors last month claiming liabilities totaling about $2.11 billion.
Some Los Angeles hotel operators even claim that business is being hurt by the Rodney King incident, in which a video camera taped a motorist being beaten by Los Angeles police. Executives say some travelers, concerned about their personal safety, are staying in hotels in outlying areas rather than downtown. “I think that publicity has been disastrous,” said A. L. Wehmeyer, assistant general manager of the Kawada Hotel on Second and Hill streets.
Others are thought to shun downtown locations over more leisurely coastal areas because some Southern California cities lack the urban amenities that stimulate travelers such as night life, stores, a variety of restaurants within walking distance and good public transportation, said J. Paul DeMyer, national director of hospitality consulting services for Kenneth Leventhal & Co.
In a seeming paradox, Orange County hotel operators complain that a recent 25% increase in passenger service to John Wayne Airport may actually be hurting local hotels. Robert McCray, senior consultant with Pannell Kerr Forster in Irvine, said: “I heard an interesting observation by a hotel manager who said that the expansion has given the business travelers more accessibility to fly in and out of Orange County in one day rather than stay overnight in a hotel.”
Nevertheless, some industry officials remain optimistic for the long term, especially for downtown Los Angeles once the new Convention Center opens.
“Longer-term, we are optimistic because the area remains a viable business center with strong Pacific Rim trade,” said Christopher Baum, a vice president at Beverly Hills-based Hilton Hotels Corp. “The hotel business typically goes through cycles of overbuilding. But the capacity will be absorbed. Then we’re off and running again.”
Chris Kraul in San Diego and Susan Christian in Orange County contributed to this story.
More Room at the Inns
Hotel occupancy has been dropping all over Southern California. In San Diego, a brief jump in post-Persian Gulf War travel by returning naval personnel and their families caused occupancy rates to rise for the first half of the year. But later figures from the summer show that they’ve fallen back.
Source: Smith Travel Research