Hotel Developers Scale Back as Travel Remains Slow
Developers scaled back their plans to build hotels in California last year as the hospitality industry continued to suffer from a shortage of both business and leisure travelers in many markets.
Hardest hit was Northern California, where the number of hotel rooms being planned fell 26.1%, to 16,623, compared with 2001, according to Atlas Hospitality Group, a Costa Mesa hotel broker and consulting firm. The number of new rooms planned in Southern California fell 12%, to 35,080.
The hotel market is spotty, said Atlas President Alan Reay, with some markets, such as Ventura County, performing well, with nearly a 500% jump in rooms planned, to 1,067.
“It’s a bit of a shock that it’s been so strong,” said Reay, who attributes most of the growth to the region’s expanding business base led by the biotechnology industry.
Room and occupancy rates in the cities of Ventura, Oxnard, Camarillo and Thousand Oaks have even climbed slightly since late 2001, while most hotels have struggled with declining numbers of guests and downward pressure on rates.
In such a climate, Los Angeles County looked comparatively good, with a 2% decrease in the number of rooms planned. Last year’s 11,623 rooms in the construction pipeline -- which starts when developers apply for building permits -- was the most of any county in the state. Eight new hotels opened in 2002, the largest of which was the 207-room Standard hotel in downtown Los Angeles.
In Orange County, the number of rooms planned fell 27.4%, to 4,568. Seven hotels opened there in 2002, the largest of which was the 371-room Marriott Suites in Garden Grove near Disneyland.
The vast majority of properties being planned and developed are higher-end limited-service hotels such as Hampton Inn & Suites, Residence Inn, Hilton Garden Inn and Courtyard by Marriott. These types of hotels have the highest profit margins for owners, Reay said, and appeal to business travelers who are watching their costs.
Luxury resorts still are being punished by the stale economy and the falloff in air travel, Reay said.
“Once we get past the Iraq situation we will see a quick turnaround in Southern California,” he said. “It could come later this year.”
Rising occupancy and room rates, which would mark a meaningful recovery for the industry, are more likely to begin in 2004 in Southern California and may not reach Northern California until 2005 or 2006, Reay said.
That won’t be soon enough for a lot of hotel owners, said attorney Jim Butler, chairman of the global hospitality group at Jeffer, Mangels, Butler & Marmaro in Los Angeles.
“We think we have seen a sea change in foreclosure bankruptcy business” in just the last few weeks, Butler said.
The evidence still is anecdotal, he said, but “many hotel owners who have held on by their fingernails waiting for the market to bounce back have broken loose” and will lose their properties.
Successful operators are aggressively courting customers through marketing programs that often include discounts and other incentives, Butler said.
“Hotel rooms are not being bought,” he said. “They are being sold.”
Such tactics may come back to bite the industry when business finally improves. Guests accustomed to negotiating a better deal nearly every time they make a reservation aren’t likely to go quietly into more expensive rooms.
And the price transparency provided by the Internet will continue to add pressure on rates. More than 10% of rooms are booked online, Butler said, and within a year or two that number is expected to double.
“Many owners worry that there is a long-term or permanent change in consumers’ expectations,” Butler said. “Some of the cutbacks in travel spending may be long-term.”
