Hotel Gold Rush Slowing : Pent-Up Demand for Rooms Brought Boom

The gold rush in hotel development is nearing an end.

With the passage of federal tax reforms requiring more equity in real estate projects, the race to build hotels that began with pent-up demand in 1980 and was fueled by tax incentives in 1981 and 1982, is expected to slow down.

The slowdown already has started in some areas. In others, it might not be apparent until 1987 or even 1988.

Bruce Baltin, a partner in the Los Angeles office of Pannell Kerr Forster (a certified public accounting firm with an expertise in the hotel industry), explained why this is happening in California:

Recession Slowdown

“There is about a five-year development period in the state for a hotel from the time the idea is conceived until the hotel opens. So, a lot of the hotels we’re seeing come on board now were conceived from ’79 to ‘81, which was a very upbeat period.

“The ‘82-’83 recession slowed the growth of new projects, and these will show up in ’88.”

Some locales are still experiencing a hotel boom, such as Orange County, where there will be an estimated 14 new hotels or hotel additions with a total of 2,600 guest rooms opened this year.

In Newport Beach alone, the number of hotel rooms nearly doubled during the last 12 months, from 700 to about 1,300.

Hotels Adding Rooms

That per Mac McNeill, managing director of the Newporter Resort, which is adding 104 rooms to its 311 in a $15-million renovation/expansion scheduled for completion by Oct. 1. The renovated hotel will be introduced to the public at its free All-American Jazz Festival on Oct. 12 from 2 to 6 p.m., a spokeswoman said.

“The Marriott is adding, we’re adding and the Four Seasons, with 310 rooms, just opened,” he said.

The 400-room Newport Beach Marriott Hotel & Tennis Club is adding 202 guest rooms in a 16-story tower with a rooftop lounge. Completion is scheduled in October.

John T. Jenkins, general manager, said, “I think we’re getting more people to stay in our hotel, but we have a broader base to fill, so we must be more competitive.”

Irvine Co. Hotels

The renovation is an effort to be more competitive.

So is the quality of the $75-million Four Seasons, which James T. Kelley, president of the newly formed Irvine Hotel Co. (a division of the Irvine Co.), says is in the same league as the $100-million Ritz-Carlton. The Ritz-Carlton opened in nearby Laguna Niguel in August, 1984.

“I would categorize the Four Seasons as world class, as well,” he said. “We think they are very competitive. The Ritz-Carlton is closer to the ocean. We are closer to other amenities. They have about 400 rooms. We have about 300. It cost us both about $250,000 a room to build, so we’re practically identical.”

The Irvine Co. owns the Four Seasons and the Irvine Hilton, which has been open for about a year. The Irvine Co. also owns the land under the Newport Beach Marriott, the Newporter Resort, the Airporter and Irvine Host.

A model of the 150-mile Irvine Ranch area owned by the company shows what is built out and planned through the year 2000. Included in those plans is a new hotel a year for the next 10 years.

Additional Construction

Overly ambitious in light of current tax reforms? Kelley says it’s not.

The hotels have been envisioned since William Pereira master-planned the area in the post-World War II era, and Kelley still means to see them built--”at this point, anyway,” he said. He expects the next two to be under construction within 12 to 14 months.

“Well, the Irvine Co. is unique, because they control so much land, so they control the market,” Baltin said. Kelley agreed that he thinks the new tax legislation will generally slow hotel growth.

However, he added, “I think we will have some wonderful opportunities to participate in the resort market.”

Resort Hotels Popular

A study by the national accounting firm Laventhol & Horwath projects that resorts will be the fastest growing segment of the lodging industry during the next 15 years, expanding from about 400,000 hotel rooms now to 480,000 in 1990, an increase of 20%.

Saul Leonard, national partner for Leisure Time Industries (a division of Laventhol & Horwath), said that current tax reforms will be negative for business hotels “because business expenses like travel and education will no longer be deductible.”

But for resort hotels? “Hotel developers will probably be more positive about the pleasure end because there will be more disposable income.”

The resort market already is growing like sagebrush in the Coachella Valley. Gil Zimmerman, executive director of Desert Resort Communities Convention & Visitors Bureau in Palm Desert, can go on for several minutes just listing the resorts and hotels expected to open in the vicinity within the next few months.

Doubled in Size

“By 1990, we will have virtually doubled in size, from 50 to 100 golf courses and from 4,000 to 10,000 guest rooms,” he said. The activity started about two years ago, when his bureau was formed, he added.

Construction of additional hotel rooms was expected when approval was granted for the Eichelberger Convention Center, scheduled to open in May in Indio, and the Palm Springs Convention Center, due to open along with the Wyndham Hotel in the fall of 1987.

However, the hotel boom has not been confined to Palm Springs and Indio. In Palm Desert, for instance, the Marriott’s Desert Springs Resort & Spa is well under way with completion targeted for February.

That’s when the $120-million Grand Champions Resort Hotel in Indian Wells is sold out, and that project isn’t even due to open until this November. Reason for the sell-out? The Pilot Pen Tennis Classic will be held in the new resort’s 10,000-seat tennis stadium in February.

Other Amenities

Tennis courts and golf courses are traditional kinds of “extras” offered by certain hotels, but now--in the spirit of competition--new hotels are offering tennis stadiums, exercise rooms, jogging trails, meeting rooms with microphones at each seat, gourmet restaurants, pool-side barbecues and concierge floors with immediate check-in and private lounges.

As part of the $30-million renovation just completed at the Hilton in downtown Los Angeles, the top two floors of the 16-story tower are in this category. “All guest rooms there have two-line telephones, mini-bars, bottled water, bathrobes and continental breakfast,” Larry Kirk, general manager, said, “and some even have two bathrooms.”

Art programs and interior design are playing larger roles in the new hotels. Juergen E. Bartels, president and chief executive officer of the Minneapolis-based Carlson Hospitality Group, said, “America is now design conscious. There was a time that nickel and dime light fixtures were OK. It was called ‘luxury for less.’ Now that’s a joke.”

His focus on design is one of several ways he aims to attract women to the Radisson hotels, which are under his direction. “Women have more influence on our business than men today because as secretaries, women decide where men stay; as mothers and wives, they often decide where the families vacation, and as travelers, they go on business or pleasure in their own right.”

Hotel Concentration

In three years, Radisson has quadrupled in size from 23 hotels centered mainly in the Midwest to more than 90 properties worldwide, including the Radisson Plaza Hotel & Golf Course in Manhattan Beach, which will hold its grand opening on Sept. 20.

The Manhattan Beach Radisson is in one of the locales with the highest concentration of new hotels: the area near Los Angeles International Airport.

As George Scudder, general manager of the LAX Marriott, observed, “There are close to 7,000 first-class rooms in the immediate area, and of those, 5,000 are 4-years-old or newer.” In addition, there is the year-old Skytel at LAX, which has rooms that rent by the hour.

So what Bartels says for the hotel industry as a whole is especially true in the airport area: “We’re in a marketing battle.”

International Center

The result: “A group of us are trying to get the LAX International Business Center, a loose-knit marketing entity for the area, launched,” Scudder said, “and we’re selecting consultants to do a feasibility study for an international congress or conference center to appeal to worldwide symposiums.”

If that is built, it will be the first like it in the United States, he added. There are similar ones in Europe, Manila, Singapore and Kuala Lumpur, Malaysia.

It would not be competitive with the convention center in downtown Los Angeles, he said, as it would be geared more for meetings instead of exhibits.

The Los Angeles Convention Center is expected to be expanded “to make it three times its present size by Jan. 1, 1991,” Joe Phillips, director of convention marketing for the Greater L. A. Visitors and Convention Bureau, said, “and with that, there will be a real need for additional hotel rooms downtown.”

Several are planned, he added: “one in the California Plaza, one on the old Philharmonic site and another in the South Park area.”

‘Bullish on the Area’

Other areas of town are also getting new hotels. Another Four Seasons is due to open in Los Angeles near Beverly Hills in March, and Isadore Sharp, head of the Toronto-based luxury hotel chain, said, “We’re very bullish on the area. We think it’s a great market.”

This despite the filing for bankruptcy protection in February of Ashkenazy Enterprises, which runs several fancy hotels nearby.

Even the airport area is getting new hotels. Besides the Radisson, the $83-million, 750-room Stouffer Concourse Hotel opened Aug. 11. However, some future hotels have been put on hold.

Donald Miller, deputy general manager of the Department of Airports, said, “We have property where we could locate three hotels, but whether or not we’ll do them, we’ll see in another year or two.”

Geared toward Economics

Leonard of Laventhol & Horwath expects to see this happening more and more. “It’s harder to get financing because of the oversupply of hotel rooms in certain areas and the need for greater amounts of equity,” he said. Because of the new tax laws, projects must be geared more toward the economics.

“Because of the cost of construction, there will be more of the limited-service facilities,” he predicted. “The tax legislation could have an effect on food and beverage operations.

“Also, we will see the decline in value of some hotels during the next year or two, so there will be an opportunity for some good buys.”

And though construction will slow down for awhile--resulting in increased room rates, he said, by 1987, he sees demand increasing again faster than supply. “So then, assuming that the economy stays healthy, more hotels will be built again,” he predicted.

‘No Long-Term Problems’

It won’t be like the current gold rush in hotel development, which has seen an annual increase for the last few years in Southern California hotel rooms of 10% a year, Baltin estimated.

“We’ll see fewer real estate transactions because there is less incentive (tax-wise) to buy and sell,” Leonard said, “but I see no long-term problems for the hotel industry, especially in Southern California.

“Food and beverage services may be reduced, but rooms and other services are far superior to what they were years ago.”

“So the consumer will get more for the dollar.”