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O.C. hotel woes? High end starts '16 on wrong foot

May 31 2016

O.C. hotel woes? High end starts ’16 on wrong foot – The Orange County Register

The local hotel business has been hot for so long that a little chill at tourism’s top end is reason for worry.

Overall trends for Orange County hotels still look pretty solid. In the first three months of the year, average room rates countywide rose 3.2 percent to $179 a night, CBRE Hotels reports.

Higher prices did not deter many visitors, though, with 79 percent of rooms filled vs. 77.9 percent a year ago. That meant a typical owner’s cash flow – measured by an industry metric known as “Revpar” – was up 4.7 percent over the 2015’s first quarter.

So what could be wrong? Just look at the roughly flat, subpar results in Orange County’s high-end hotel markets in the first quarter, according to CBRE Hotels:

• Newport Beach hotels averaged nightly rates of $239 – the county’s priciest rooms – up 1.8 percent vs. a year ago. Occupancy slipped to 76.8 percent from 77.7 percent a year ago. So cash flow nudged up only 0.7 percent in an year.

• In South County, rooms averaged $227 a night, up 4.5 percent vs. a year ago. Occupancy slipped, too: 74.9 percent vs. 76.8 percent a year ago. So cash flow rose only 1.9 percent in a year.

• Then there’s Huntington Beach, where rooms averaged $236 a night. That’s up 5.1 percent vs. a year ago but visitors balked. Occupancy fell to 77.7 percent from 82 percent a year ago leading Surf City hotel cash flow to dip 0.5 percent in a year, according to CBRE.

Veteran hotel developer Bob Olson isn’t surprised He has been a recent seller of four hotels in the region – two in Tustin, and one each in San Juan Capistrano and Burbank – that his company built just as the hotel recovery was beginning as the Great Recession ended.

“We think things are topping out,” Olson said.

It’s not that Olson’s quitting the hotel game. His R.D. Olson Development has stakes in seven new hotel developments in its portfolio – five under construction – and one, the 250-room Paséa Hotel in Huntington Beach quietly opened Thursday.

Olson has switched his emphasis from properties in typical suburban hotel-court settings to higher-end, more difficult to build locations where he thinks his company’s development skill will be best utilized. Many of his current projects, including Huntington Beach, were a decade-plus in the making.

“I think the hotel business will be O.K., but it’s become market-by-market,” said Olson, who admits hotel operators will be challenged by a host of factors in coming years.

No only will the industry juggle regional quirks, overall economic performance will be a major factor. High-end hotels in particular may be hit by fewer visits from two previously lucrative clients: foreign tourists, scared off by a strong U.S. dollar and weak overseas economies; and business travelers, with bosses anxiously watching corporate bottom lines.

“If you can tell me where the economy is going, I can tell you where hotels will go,” Olson said.

Many hotels are running at occupancy levels that are essentially “sold out” conditions. That has helped push up hotel rates by 30 percent-plus since mid-recession lows.

But Orange County’s early 2016 hotel results suggest some travelers are balking at pricier rooms. Look at how well Orange County’s relative hotel bargains are faring:

• North Orange County has the county’s cheapest rooms, at an average $112 a night. Still, that’s up 5.7 percent vs. a year ago. Rising rates came as occupancy jumped to 82.1 percent – the countywide high – compared with 79.5 percent a year ago. That meant an owner’s cash flow rose 9.2 percent in a year, the county’s best growth.

• Costa Mesa area hotels ranked second in cheap rooms and cash-flow gains. Average rates were $138, up 9 percent vs. a year ago – the county’s biggest price hike. Occupancy ran 78.1 percent vs. 79.9 percent a year ago. Cash flow rose 6.4 percent in a year.

• Anaheim has Disneyland, so it bucked the low-price success trend a bit. Its room rates averaged $183, up 1.9 percent vs. a year ago. Occupancy in the theme park district rose to 80.5 percent vs. 77.1 percent a year ago, as cash flow jumped 6.3 percent in a year.

• The airport area hotels had an average room rate of $141, up 5.5 percent vs. a year ago. But occupancy slipped to 78.3 percent vs. 78.6 percent a year ago. Still, cash flow was up 5.1 percent in a year.

Olson thinks the Orange County hotel market has at least 18 months of solid performance to go, barring some economic shock. But he’s knows future success won’t be easy.

“I feel like we’re in the seventh inning,” he says of the hotel upswing. “I hope we don’t get rain. I’d like to get a full game in. Even go to extra innings.”

If 2016’s start is a good barometer, hotel owners may have to shelve rate hikes to keep the “No Vacancy” sign on.

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