Hotel Mantra: Bigger Is Better, as a Travel Boom and Rising Room Rates Lead to Merger Mania

Hotel Mantra: Bigger Is Better, as a Travel Boom and Rising Room Rates Lead to Merger Mania

Orange County Register

Hotel Mantra: Bigger Is Better, as a Travel Boom and Rising Room Rates Lead to Merger Mania
By Jonathan Lansner

No business has been hotter than hotels coming out of the recession – and the money chasing that momentum has been equally impressive.

Monday brought another megadeal to the industry, as hotel chain operator Marriott International said it would pay $12.2 billion for competitor Starwood Hotels and Resorts.

The deal would create the world’s biggest hotel management company, operating or franchising 5,500 hotels with 1.1 million rooms worldwide. Locally, Starwood runs the St. Regis Monarch Beach in Dana Point; Westin South Coast Plaza in Costa Mesa; Sheraton Park Hotel in Anaheim; and Sheraton Garden Grove.

Just two months ago, investment giant Blackstone Group – already owner of the Hilton and Motel 6 chains – said it would pay $6 billion for Strategic Hotel, owners of 17 luxury hotels, including Orange County’s Ritz-Carlton Laguna Niguel and Montage Laguna Beach.

The buying spree means California hotels are in high demand. A record $4.4 billion was spent to buy 174 California hotels in the first half of this year, according to Irvine-based Atlas Hospitality Group, a hotel consulting firm.

So why does money chase hotels? Just look at the sharp rebound of the hotel trade in Orange County – a classic tourism hot spot – according to statistics from PKF Consulting that show “no vacancy” signs are hard to find.

In the first eight months of the year, Orange County hotels were 81.4 percent full vs. 80.4 percent a year earlier. That’s up from 66.4 percent for all of 2009, in the depths of the recession.

The lack of vacancy pushes up prices. The countywide average room rate is $174 a night this year – up 6 percent in 12 months and 27 percent in six years.

Fewer vacancies and rising room rates mean more profits for operators and owners. Orange County’s hotel cash flow is up 7 percent in one year and 55 percent since 2009, according to one estimate by PKF.

And it’s not just Orange County. That measure for Los Angeles hotels is up 68 percent in six years. In San Diego, it’s up 48 percent.

The business world’s renewed confidence means business travel is growing. Meanwhile, consumers surprisingly have made vacations a must-have part of the household budget. Hotel operators and owners see the trends, and they want more of the pie.

These giant acquisitions are a bet on lowered management costs, while giving a newly consolidated group like Marriott-Starwood wider appeal around the world. Owners such as Blackstone boost hotel portfolios because the fatter cash flow they get from their properties looks better than many other investments.

Still, questions pop up.

Has pricing become too frothy – like it did a decade ago?

These same fundamentals have lured developers to build more hotels; could the new supply limit potential room-rate increases?

Will service slip at these giant hotel companies, opening the door for new competition? And, of course, how long can the travel boom last?

“The Lodging cycle is maturing, but imminent demise seems unlikely,” wrote hotel analysts at Green Street Advisors.

As always, time will tell. But the hotel industry’s bet is clear. Adam Aron, Starwood’s CEO, told investors after the Starwood deal: “Today, size matters.”

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