Record Room Prices Tempt Developers into Hotel Construction

Record Room Prices Tempt Developers into Hotel Construction

Silicon Valley Business Journal

Record Room Prices Tempt Developers into Hotel Construction
By Nathan Donato-Weinstein

Working late into the night during a Mountain View City Council meeting last June, hotel consultant Maurice Robinson missed his flight back to Los Angeles. No worries, he figured. There’s always a place to stay.

But as he quickly figured out: If it’s a weekday in Silicon Valley, the answer is — maybe not.

“I got on the phone and was calling every hotel in town,” Robinson said. “All the usual suspects were full.”

He ended up paying $300 for a third-tier property on El Camino Real.

“They probably average about $150 a night,” Robinson said. “But this is the guy’s last room. And I’m probably the first guy to ever pay that.”

Ask anyone who has traveled to the Bay Area lately for business, and you’ll likely hear horror stories like Robinson’s. Booming employment — 113,500 jobs were added in 2014 — has brought a surge in weekday business travel. Combine it with little new supply in the last five years, and hotel occupancy in Santa Clara County climbed 32 percent between 2009 and 2014, according to industry tracker STR. Average daily rates zoomed 50 percent.

“If there’s any one word that sums it up, it’s ‘record,’” said Alan X. Reay, president of Atlas Hospitality Group, an industry consultancy. “With Google, Facebook, everything going on up there, it’s a market everyone wants to be in.”

The boom coincides with high-profile events that will bring thousands more travelers to the region. Sunday’s Wrestlemania at Levi’s Stadium — and events leading up to it this week around the San Jose area — are expected to draw up to 70,000 travelers, according to the Santa Clara Convention and Visitors Bureau. That’s just a warm-up for Super Bowl L on Feb. 7, 2016.

Now developers are rushing to meet demand — both by reviving long-dead projects and planning new ones. Yet the pipeline of roughly 4,000 rooms being planned in Santa Clara County, and roughly 800 in San Mateo County, won’t make a serious dent, experts say, and obstacles remain for hoteliers.

“This is arguably one of the strongest markets, if not the strongest, for hotels,” said industry veteran Thomas Callahan of PKF Consulting USA.

Select service dominates

It’s a recent Tuesday, and workers are scrambling to put the finishing touches on Aloft Sunnyvale, an 85-room property near the Murphy Street downtown district that in a former life was the kind of place you could rent by the hour.

Now, each headboard comes with two USB ports, and three large Apple monitors overlook a row of sleek tables in an area called the iLounge. “If you want to use the monitors to show a spreadsheet, you can just zip it right up there,” said General Manager Richard Honea on a recent tour, as Morrissey flowed over the sound system. On its fourth day open, with zero marketing, rooms were sold out for the rest of the week at rates above $300.

The project is emblematic of the current wave of hotel development. Called “select service” properties, they offer comfortable rooms and lounges, limited food service and modest meeting space. They are less expensive to operate and run, and appeal to travelers minding a budget. They’re also relatively small — generally 100 to 200 keys.

“What you’re not seeing is a new Fairmont, Marriott, Hyatt of 300, 400, 500 rooms,” said Rick Swig, a member of the Swig hospitality family and president of RSBA & Associates, a consultancy.

Translation: While development is ramping up, it’s hardly headed for a glut.

“I don’t think there’s a snowball’s chance in heck there can be oversupply,” said Callahan, whose firm predicts room supply in the San Jose area will jump 3.3 percent this year — and that demand will grow 3.9 percent.

This is great news for hotel owners, developers and operators, who suffered with empty rooms during the recession years. It’s not so great if you need to get a room — or several hundred.

“It’s honestly unlike any period, including the dot-com boom,” said Marc Casto, president and chief operating officer of San Jose-based Casto Travel, which has a large corporate travel management practice.

Casto said average room rates for his clients have jumped about 20 percent year to date, compared to a 12-point jump for the same period last year. The average corporate rate is now about $280 midweek.

“The bigger challenge, compared to availability, is rate negotiations,” he said. “Part of our service is to negotiate flat rates. Discounts are not as generous as they used to be.”

Supply problems

Things are so tight not only because of increased demand, but also because developers haven’t built much since the recession.

There are several reasons: Financing was nonexistent, and investors who wanted to get into the market chose to buy existing assets rather than do riskier new construction.

And as the economy revived, hotels have had to compete with residential and office players for the same scarce land.

“Right now in Silicon Valley, all the tech companies are chasing each other to buy dirt to build office space, so that’s driving up the values,” said Robert A. Alter, president of Corona Del Mar-based Seaview Investors.

In some cities, the supply of hotel rooms has declined. Sunnyvale’s room count dipped slightly between 2011 and 2014 as developers knocked down older properties to make way for new, non-hotel projects.

“The hotel industry is not growing at the same rate as corporations,” said Barbara Arena, president of the Silicon Valley Business Travel Association, who is also lead category manager of global travel sourcing for Oracle Corp.

“You’re putting big companies and headquarters here, and there’s really no place to house the travelers. If you have to go to the Bay Area in the next week, it’s near impossible to find a room at a very competitive rate.”

Losing out?

The crunch has real implications for the region’s economic health.

“The big question for companies like ours is, No. 1, how are you supposed to conduct business in this type of environment?” said Jolee Goularte, government relations director for the SVBTA and senior manager for global procurement of travel and events at Flextronics International Ltd. “Our people have to book two months out when they come, and that’s not realistic when it comes to corporate travel.”

Even a week’s notice might not be good enough. Joel Chusid, executive director for Hainan Airlines in the U.S., was staying at a San Jose hotel on recent weeknight and needed a room a week later. (The China-based airline was set to announce its new route between San Jose and Beijing.) When he walked around the neighborhood to ask about availability, he was told hotels were booked solid for the following week.

To cope, observers said, companies are renting at hotels further afield; Flextronics rents out a couple of rooms constantly, regardless of whether a traveler is coming. And some observers said more firms are considering holding major events elsewhere.

“Believe it or not, it’s less expensive to have an event in Napa than Silicon Valley,” Goularte said.

What’s in store

There’s some relief on the horizon. Developers are laying plans for at least 36 projects, which could bring up to 4,700 rooms in Santa Clara and San Mateo counties. More expansions and ground-up projects are announced seemingly weekly.

The biggest recent news: A new full-service property with 250 rooms planned for Menlo Park that will be part of the high-end Marriott Autograph Collection, a marketing network for boutique independent hotels.

Yet the pipeline is not deep everywhere. Even with the new Levi’s Stadium, Santa Clara has yet to see a new hotel proposal this cycle.

“It’s surprising to me, but we have no hotel applications at the moment,” said Kevin Riley, planning director. “I can think of four possibilities but none of them have yet gelled in any way.”

Most projects in the works are select-service projects. Barry Swenson Builder and Huntington Hotel Group this month acquired an office building in San Carlos where they are considering a select-service property with up to 130 rooms. Bill Ryan, senior vice president of development for Barry Swenson Builder, said the company hasn’t yet linked with a hotel brand.

“There wasn’t any building for much period of 10 years,” he said. “Developers are anxious to get more product. The numbers are starting to work to move forward.”

Still, there are risks. Silicon Valley’s hotel market is notoriously dependent on weekday travel, so any decline in corporate stays would hit the market hard. That’s what happened a couple of years ago. The delinquency rate for hotel loans in the San Jose area backed by commercial mortgage-backed securities hit 22 percent in May 2010 up from zero in 2009, data from research firm Trepp shows.

Lew Wolff, who co-owns the Fairmont Hotel in San Jose, said he’s not convinced the area needs more hotels. He suggests that the spurt in hotel development is based more on the availability of investment funds and creative new franchise brands than a lack of hotel room supply.

“Hotels do not lead growth trends, they follow,” he said.

Or as John Vidovich, owner of Cupertino’s full-service Cupertino Inn, put it: “Is the market going to last? Who knows? Every business cycle is different, but they do cycle.”

Weekday action drives Silicon Valley hotel market

Getting a room during the week in Silicon Valley? Get ready to shell out some serious cash. Come Friday, Saturday or Sunday, however, and it’s a much different story.

“There’s very strong midweek patterns,” said Ben Roschke, director of business development for Team San Jose, San Jose’s tourism booster group.

That’s not a problem unique to Silicon Valley, but observers say it is more pronounced here. “Everyone wants hotel rooms at the same time,” said Rick Swig, president of RSBA & Associates, a consultancy. “You want to buy a hotel on Friday or Saturday night? No problem. On a Monday or Tuesday night? Problem.”

The dynamic is one reason why hotel development is somewhat riskier here than somewhere like San Francisco. Swig compares each city’s market to a three-legged stool, with leisure, group and business travel each making up a leg.

“It’s not a leisure destination,” he said of San Jose. “Right now in San Jose, the corporate and group legs are so strong they can compensate. But if one of them for whatever reason starts to crack, once again San Jose and the surrounding area is going to fall on its face.”

There are efforts to change that. Team San Jose hopes to get business travelers to tack on a few days to their stay and check out local sights — something called “bleisure.” The nonprofit recently launched an app in partnership with the startup UTrip designed to help travelers find things to do. Tell the website your trip dates, give it some information on what types of sights and activities you’re interested in, and the system spits back a list of possibilities.

“We’re in the midst of launching several tourism initiatives and looking to put more investment into destination marketing,” Roschke said. “We see enormous potential for leisure, and we’re looking to translate business travelers into weekend leisure.”


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