CoStar
07/13/18

Potential Hotel Wage Hike in Anaheim, Calif., Leads Disney to Mull Other Development Options
By Lou Hirsh

http://www.costar.com/News/Article/Potential-Hotel-Wage-Hike-in-Anaheim-Calif-Leads-Disney-to-Mull-Other-Development-Options/202747
Hotel operators including Disneyland are not in a happy place with a ballot measure in the California city of Anaheim that could raise workers’ minimum hourly wages at some properties from $11 to $18 by 2022, a proposal that is already slowing development plans.

Some analysts say passage could send hotel developers looking outside the city for future projects — in places like neighboring Garden Grove in Orange County — as the popular resort owned by The Walt Disney Co. attempts to boost its visitor counts even higher with an upcoming Star Wars attraction opening in 2019.

Wincome Group, based in Anaheim, already has put on hold a four-diamond luxury hotel, entitled for 700 rooms on Harbor Boulevard across the street from Disneyland, until it knows the outcome of the “living wage” measure recently placed on the November ballot by the Anaheim City Council.

Wincome Group has begun construction on its $250 million Westin Anaheim Resort, located near the city’s convention center, which is in the resort district and would be affected by the ballot measure.

The proposal applies specifically to hotel developers that have tax rebate arrangements with the city, and would result in some Anaheim properties paying among the highest wages in the nation, rising to $15 per hour in 2019 and $18 per hour by 2022.

Proponents, including local labor unions, contend Disneyland employees and other hospitality workers require higher wages to meet escalating living costs in Orange County. The ballot measure is focused on hotel companies that were awarded about $700 million in transient occupancy tax subsidies over 20 years by the city of Anaheim in 2013 and 2015.

City officials said the subsidies, granted to operators including Disney and Wincome Group for their separate projects, were intended to support development of a total of five four-diamond hotels in the Anaheim Resort District as the city attempts to bring in more high-spending visitors.

Officials of The Walt Disney Co., based in Burbank, CA, did not respond to requests for comment. In a late May statement published by Bisnow, a Disneyland spokeswoman said Anaheim has become “an increasingly hostile business environment,” which the company said is disappointing given the jobs and tax dollars generated in the city by Disney’s investments over the years.

Hotel analysts contacted by CoStar News said raising wages, to the extent called for in the ballot measure, could actually serve to discourage the type of high-end development the city was originally trying to encourage with the tax rebates. This comes as hotel construction, financing and other costs are already on the rise.

Even as Southern California benefits from historically strong tourism, operators can’t count on the current good times lasting forever. That’s going to impact developer appetites to take on risk, especially with higher-end properties.

Alan Reay, president of Irvine, CA-based brokerage and research firm Atlas Hospitality Group, said there would soon come a point where hotel wages approaching those in the ballot measure would make it hard for a hotel development to work financially in the long run.

“I don’t know how that would be sustainable,” Reay said. “You would need to count on continued increases in revenue to sustain the higher costs, and revenue has already been rising for seven years straight in California.”

While city-specific data was not available, Orange County hotels generated more than $1.03 billion in revenue in the first five months of 2018, up 4.2 percent from the year-earlier period, according to research firm STR. A big portion of the county’s hotel business is generated by Disneyland, which had almost 18 million visitors in 2017.

While Anaheim has by far the largest number of hotels in operation or in development within Orange County, the ballot measure’s fate could have implications for what is currently a healthy local construction pipeline well beyond the targeted resort district.

Atlas Hospitality data indicates Anaheim at the end of 2017 had two hotels with a total of 787 rooms under construction. There were another 13 hotels with 4,194 rooms in various stages of planning.

Most of the hotels now being built in California tend toward mid-priced, limited-service offerings with about 200 to 300 rooms. They are currently the easiest to get financed and often the most efficient to operate, especially if two or more brands can share some services on a single campus, Reay noted.

Reay said an environment of rising labor costs generally favors limited rather high-touch services in newly developed properties. Many Southern California hoteliers have already taken steps toward more self-service in their offerings, buffet instead of full-service restaurants, for instance, with some hoteliers already selling or leasing out their existing eateries to other operators to cut labor expenses.

Hotel operator and consultant Robert Rauch, chief executive of San Diego-based RAR Hospitality, said rising hotel labor costs have already pushed development to adjacent suburban markets in major hotel centers like Seattle and New York City. In the case of Orange County, he said, suburbs like Garden Grove have attracted plenty of hotel developers over the years thanks to proximity to Disneyland, and other local cities could seek similar business in the future.

The hotels getting built are increasingly using technology like robots to bring towels and other items to guest rooms, as well as provide security. That technology isn’t yet displacing huge numbers of workers, but the trends could accelerate as more consumers decide they don’t need to interact with staff for things like room check-ins and obtaining information related to on-site services and off-site attractions.

“It isn’t just the millennials using tablets and mobile devices for those things,” said Rauch, whose company has properties and clients throughout Southern California and Arizona. “More and more people, including customers in those older age groups, are very comfortable with the technology.”