Intense competition for guests and multiplicity of lodging options have raised speculation among hotel owners and potential investors about what and where to build.
While competition exists between hotels in the same vicinity, it has not had the overall impact of the on-again, off-again rate wars in the airline travel industry.
Hoteliers are most concerned with the threat of overbuilding, the need to upgrade and save outdated properties and marketing and managerial skills in keeping a hotel in business.
Some wonder if the hotel industry is simply in a shake-out period that reflects a healthy, evolving change, while other industry sources agree that the question of how and when to build is becoming more difficult to answer.
State Greatest Potential
Hyatt, one of the leading hotel chains, is a good example of the trends in an industry in a state of flux. Already operating seven hotels in the Los Angeles-Long Beach area, Hyatt considers California its greatest potential for future development and has just opened a development office in Newport Beach, the only one outside of its headquarters in Chicago.
Jay Maxwell, head of the new office, said that "while industry analysts cry that the industry is overbuilt and occupancies continue to drop, the Hyatt chain is now in the midst of one of its most aggressive expansion programs.
"In our first 30 years, we opened 85 hotels; in the next five years, we plan to open 50 more in the U. S., Canada and the Caribbean."
In one of several interviews with executives within the U. S. hotel industry, Saul F. Leonard, national partner of the certified public accounting firm of Laventhol & Horwath's leisure time industries division, said the hotel market has been volatile and expansion-oriented in recent years and that by 1988, the somewhat lopsided supply/demand ratio of today would become more balanced.
Supply Outstrips Demand
"The diversity of lodging products has increased and created a supply far greater than the demand necessitated," Leonard said.
His firm forecasts a slowdown in development for the industry during 1987, flat occupancies and sluggish room rates, and a need for financial reassessment, all of which points to a strong buyer's market that will continue for as long as a surplus of rooms exists.
Other hotel sources noted that unlike the airlines, the hotel industry must cater to a broader spectrum of competition.
For the most part, current hotel investment is an educated guess, says Roger Halpert, group manager for the real estate division of M. C. S. Associates, a Newport Beach-based consulting firm to financial institutions making loans to the lodging industry.
"It's difficult for a hotel investor to predict how many other hotels will be built in a given area, therefore how much competition a developer is likely to be up against," he said.
"In Orange County, where hotel occupancy is low due to an oversupply of hotel rooms resulting from a rash of building, we have the classic case of supply growing at a faster pace than the demand."
"On the demand side, determining occupancy factors may hinge on weather and the general level of the economy. Who could have foreseen the situation in Houston and the dramatic drop-off in demand for hotel rooms (and services in general) which occurred when the oil industry went sour?" Halpert asked.
The hotel development boom of a few years ago has suffered from saturation, changing market demands and will feel the pinch of the Tax Reform Act of 1986, he added.
Elimination of Provisions
The real estate provisions expected to have a negative impact on hotel development are the elimination of the investment tax credit, reduction of tax credit for historic buildings, lengthened depreciation periods, elimination of special capital gains treatment on sale of assets and severe limitations on the deductibility of real estate "passive losses" by individual investors.
In its newly issued 1987 analysis for the state Office of Tourism, the Los Angeles-based accounting firm of Pannell Kerr Forster, estimates new growth in hotel and motel rooms in the Greater Los Angeles area this year at a strong rate of 7.2%.
But a projected increase in overall demand for the state's largest lodging market will mean a slight reduction in hotel occupancy rates for the region as a whole. That will result in a projected annual occupancy rate this year of 67.7% compared to a 68.2% last year. For California, as a whole, the projected rate is 66.9%.
A veteran general manager of a downtown hotel said investors can achieve a break-even point at 55%, depending on the debt service for the property.
Investors Seek Prestige