The Orange County Register
08/26/19

‘Head-scratcher’: As Tourism Cools, 20 Hotels Open in Southern California
By Jonathan Lansner

‘Head-scratcher’: As tourism cools, 20 hotels open in Southern California

Southern California’s hotel building boom is heating up just as tourism faces everything from declining visitor growth, a labor shortage and rising costs.

Atlas Hospitality Group’s mid-year reports on lodging development and sales activity tell us there’s little cooling in hotel construction in Los Angeles, Orange, Riverside and San Bernardino counties:

(1) 20 hotels with 2,478 rooms opened in 2019’s first six months vs. 11 hotels with 1,712 room a year earlier.

(2) 89 hotels with 14,016 rooms were under construction at mid-year. That’s 20 hotels than June 2018.

(3) 462 hotels with 67,964 rooms are on drawing boards at mid-year. That’s up 60 hotels planned in a year.

And this building boom is not just a local trend. Statewide, 36 hotels opened this year vs. 26 in 2018. Under construction? 234 hotels, up 51 in a year. In planning? 1,143 hotels, 184 more.

Yet hotel developers’ optimism seems askew from some travel industry benchmarks. Filling rooms is more challenging in 2019, as is filling staffs to clean those rooms. Plus, operations costs are rising. And investors are changing their buying habits.

“It’s pretty amazing how many hotel rooms are being added,” says Atlas president Alan Reay. “It’s a little bit of a head scratcher.”

Peek at one key business barometer: passenger traffic at the region’s five airports, as tracked by VisitCalifornia. In 2019’s first six months, 1.1% more passengers flew to and from Southern California. Yes, that’s more people but it trails 2018’s 4.1% growth and 2017’s 5.2% upswing.

Like the economy overall, tourism is not as hot as it once was.

Hard to fill rooms
Southern California hotel owners have found it tough to fill more rooms this year, limiting their ability to hike room rates as costs rise.

According to CBRE Hotels’ mid-year report on local hotel conditions, occupancy rates in 2019’s first six months rose in only 12 of the 31 hotel submarkets it watches in the four counties. That may not be as alarming it first sounds. Numerous local hotel markets have never filled this many rooms before, so further improvements in occupancy may be difficult.

Room rate hikes in the first half were seen in 19 of those 31 markets. That meant the key “RevPar” cash flow measurement increased in just 15 submarkets.

Those weak numbers come as hotel operators battle cost pressures in recent years, especially for the laborers who clean rooms and serve guests.

One measure of hotel pay shows the U.S. industry’s weekly wages are up 2.7% in 2019. And the Producer Price Index for hotel supplies shows costs increasing at a 3% rate in 2019’s first half.

Hard to fill jobs
Cost-conscious operators translate to Southern California hotel hiring hitting a post-recession low.

My trusty spreadsheet, looking at state employment data, found “accommodation” jobs in the four-county region grew by only 519 workers to 94,986 in the year’s first six months with the same period in 2018.

That meager hiring — equal to 0.5% yearly — is the slowest pace since the Great Recession crushed the local hotel industry and is roughly one-fifth of the hiring seen in 2013-18. That’s when Southern California hotel bosses averaged adding 2,543 workers yearly, or 2.9% annualized growth.

When unemployment runs near historical lows, as it is statewide, low-wage industries such as hotels have a tough time staffing up.

“Hotel operators have been heroic in their efforts to find employees and combat rising wage rates. Market conditions indicate that hoteliers must pay the prevailing wage rates, or better, to meet their staffing needs. We do not see this upward pressure on labor costs going away in the near-term,” analysts at CBRE Hotels wrote in a recent report.

To be fair, this hiring slowdown isn’t just tourism. The region’s labor shortage hits many employment niches. Job growth for all Southern California industries ran 1.1% in the past year vs. 2.5% annualized in 2013-18.

Buying smaller
Another sign of caution: Southern California hotel investors have switched gears, buying more but smaller properties in 2019’s first half.

According to Atlas Hospitality Group, 56 hotels in the four counties were bought in the first half vs. 41 in 2018. My trusty spreadsheet tells me the region represented 39% of all California hotel deal so far this year vs. 31% in 2018.

With the buying increase came a smaller appetite, per investment. The average Southern California hotel sold had only 68 rooms this year vs. 104 in ’18. That helps explain why the price per room paid locally was on average 22% lower this year.

The regional trend is a sharp contrast to dealmaking in the rest of the state where 89 hotels were sold in the year’s first six months. That’s down slightly from 93 in 2018. The size of the average sold was flat at 82 rooms and price per room inched up less than 1%.

“If you’re in it for the short-term, that’s dangerous,” Atlas’ Reay says of risks being taken by hotel owners. “In good locations, and if you’re in it for the long-long-long haul … you should be ok.”