Hotel Boom Could Give Way to Financial Workouts in 2002
TOURISM
SPECIAL REPORT
by Sandi Cain
Orange County’s tourism industry starts 2002 on its head.
Starting in the summer, rosy projections for 2001 gave way to a softening economy. Then Sept. 11 sent forecasters back to the drawing boards in a bid to figure out how to rekindle visitor interest in 2002.
Early projections suggest it could be September before OC starts to see a real tourism recovery. A recent Travel Industry Association survey said nationwide travel likely would be down about 8% through the winter months.
A year ago, conventional wisdom held that only an economic downturn could stand in the way of tourism growth once the Anaheim Convention Center, California Adventure and Downtown Disney were open. But no one figured war and terrorism into the equation.
“Whatever is going to happen will be different from our forecast,” Bruce Baltin, senior vice president of Los Angeles-based PKF Consultants, told attendees at a November tourism outlook conference in Long Beach.
An amended PKF forecast predicted a 2001 year-end drop in hotel occupancy levels for OC to 69%, five percentage points lower than a year ago. But continuing growth in the average daily rate to about $115 now is expected to help keep most hotels in the black. Occupancy should hit 71% a year from now, Baltin said.
Charles Ahlers, president of the Anaheim/Orange County Visitor & Convention Bureau, expects to see visitor numbers on the rise by April, a sentiment echoed in several industry surveys. Others, like some theme park analysts, think it will take until the fall.
Through November, industrywide occupancy was down 7% to 9%, with the luxury sector down 13% to 15%, according to Hendersonville, Tenn.-based Smith Travel Research. That doesn’t bode well for the county’s budding resort business.
Hotels such as Disney’s Grand Californian and the St. Regis Monarch Beach Resort in Dana Point raised the bar for OC high-end hotels in 2001. But the St. Regis, which opened just weeks before the attacks, saw business dropped by as much as 18% in October, though things since have improved.
The Grand Californian has held its own, largely because it is more reliant on vacation packages and conventions.
Three more resorts,The Laguna Beach Colony Hotel and the Hyatt Grand Coast Resort in Huntington Beach and an expansion of the Balboa Bay Club in Newport Beach,are under construction and are set to open in early 2003. A rebound in high-end leisure business will be critical.
It’s unlikely many hotel projects will get financing in the coming year. Recently opened hotels such as the Holiday Inn and Staybridge Suites in Anaheim, and Embassy Suites in Garden Grove, bear watching. So do the soon-to-open Marriott Suites in Garden Grove and Doubletree in Santa Ana.
If these new hotels have a tougher than usual time getting up to benchmark occupancies, they could face financial hurdles.
Jim Butler, Chairman of Jeffer Mangels Butler & Marmaro LLP’s Global Hospitality Group in Los Angeles, warns that workouts, receiverships and bankruptcies probably are on the horizon, with workouts less likely than a decade ago due to new federal tax rules governing troubled loans.
Energy fees, which made a brief appearance at area hotels in the spring, were rolled back in September due to improved energy prices, customer outcry and the effects of the terrorist attacks. But that’s not to say the energy crisis has gone away: we may see more hotels using cogeneration systems to control costs.
Convention hotels are likely to see a lingering reduction in revenue as conventioneers curtail lavish parties, dinners and receptions in more somber times.
Hotels cut staff and hours to save money in the wake of the September downturn. Last spring, OC’s 50 largest hotels employed 14,311 people; that number likely will drop in 2002, despite the addition of about 4,000 hotel rooms in the past year.
The convention market,a key to Anaheim’s health in particular,appears to be holding its own for 2002. According to the Anaheim/Orange County Visitor & Convention Bureau, 489 groups came to OC in 2001, bringing 959,145 attendees. That’s about the same as in 2000, though still short of the 1.2 million projected before Sept. 11.
But for 2002, 293 groups with a projected attendance of 841,738 already were booked as of early December,just about the same number as were booked for 2001 at this time last year. Given a market in which meeting planners have reduced their expectations by up to 20%, the bookings for 2002 look promising.
Meanwhile, trade show managers have said they expect losses of between 10% and 30% due to dwindling registration and exhibitor participation in the short term. But groups may see real numbers climb as the year progresses,if stability returns to the economy and there is progress in military action overseas.
OC does face increased competition from San Diego for group business now that its convention center expansion is complete. On the flip side, travelers appear to be avoiding major cities, a potential plus for OC.
Cities, too, are struggling to offset reduced tax revenue from the hospitality sector.
The city of Anaheim reaped solid rewards from its bed tax through October, with bed tax revenue up 22% year-over-year to $62.8 million. Though that increase is likely to shrink when November and December numbers come in, it should help Anaheim offset sales tax and other decreases.
In Garden Grove, the city provided assistance to developers to build six new hotels in the past two years. Some of that assistance is tied to the bed taxes generated. But assistant city manager Matt Fertal said the city isn’t on the hook for additional funds in a downturn.
“We only pay them based on what they generate,” he said.
New marketing campaigns geared to the drive-in market have been launched by city, county and state entities in an effort to bolster visitor numbers in 2002.
The California Travel and Tourism Commission recently launched a $5 million tourism recovery campaign focused on in-state travelers. A cooperative ad campaign directed at the neighboring drive-in market is soon to be launched by the Anaheim/Orange County Visitor & Convention Bureau.
And a new California Welcome Center,one of only 10 in the state and the only one in Orange County,opened in November at Main Place Mall. About 15 million Californians live within a four-hour drive of OC.
