The slides and climbs of hotel vacancy rates

The economy isn’t all doom and gloom for tourist destinations in the Capital Region. In fact, for some hotel owners in Lodi, El Dorado County, downtown Sacramento and the Napa Valley, business is booming. Too bad the same can’t be said for the region’s business hotels.

The U.S. Department of Commerce announced earlier this spring that a record 56.7 million international visitors traveled to the United States in 2007, an increase of 11 percent over 2006.

California is one of the few states that has a travel promotion budget, says James Abrams, president and CEO of the California Hotel and Lodging Association. “For anyone coming from overseas, California is well-positioned to get more than our share.”

The $50 million spent annually on a national marketing campaign and heavy international promotion seems to be paying off — nearly 5 million of last year’s visitors came to California, according to the California Travel and Tourism Commission. Many of those travelers up right here in the gold and wine regions.

A weak dollar is likely the primary factor in the ongoing solid performance of the U.S. hospitality sector in 2008, according to the 2008 Ernst & Young U.S. Lodging Report. International tourists are looking to the U.S. as a prime vacation spot, according to the report, spending more money and often upgrading to high-end and luxury accommodations because of the weak dollar.

But the dollar’s recent decline cuts both ways. According to local bed and breakfast and hotel owners, a growing number of customers are arriving from neighboring towns and counties.

“We are getting increased business this year, and we think the economy is causing people to take short trips instead of long trips,” says Cindy Sullivan, owner of Lucinda’s Country Inn in Fair Play. “We get a lot of customers from Carson City, Nevada and the Bay Area. They can come have a nice weekend, and it doesn’t cost too much.”

In El Dorado County and elsewhere, weekend events such as wine tasting, art walks and food festivals are evolving into short getaways for Northern California residents who can’t squeeze long-haul vacations this year.

The Stockton Asparagus Festival, held the weekend of April 26, saw a huge spike in visitors this year, according to the event’s Executive Director Kate Post who says the 15 percent increase in attendance greatly impacted the hotels. “We were jam-packed and reserved tons of hotel rooms because of the festival,” she says.

Seven of Stockton’s hotels offered promotional rates for the event, including the new Sheraton Stockton at Regent Pointe. The Sheraton, even with discounted rates, is the most expensive accommodation in the area and still managed to sell out on the Saturday night of the event and hit 90 percent capacity on Friday night, according to Jeroen Gerrese, the hotel’s vice president.

“My phone is just ringing off the walls,” says Jackie Richmond, owner of Wine Country Concierge, a destination management company specializing in Napa Valley travel planning. “If anything, there are more bookings now because people aren’t going to Europe. The airline rates are so high, and the dollar is so weak that people are staying here. I tried to find a hotel room for three weeknights in July, and I couldn’t come up with anything I wanted.”

Perhaps in an effort to enhance the vacation experience, many consumers are turning to boutique hotels, a section of the market that has seen tremendous success in the past decade, even through the economic rough patches of the early 1990s and present.

From 2000 through 2006, the boutique hotel industry in Northern California consistently achieved occupancy levels and average daily room rates well above the industry average, according to a March 2008 trend report published by PKF Consulting. Revenue for boutique hotels historically average 56.1 percent more than typical lodging, according to the report, though operating expenses run roughly 55 percent higher than average properties.

But while hotel rooms in getaway destinations are filling up for summer, the region’s business hotels are experiencing a decidedly different trend. “We’re about 20 to 25 percent down,” says Aaron Singh, general manager of Comfort Suites in Elk Grove, a property that traditionally caters to short-stay business travelers. Singh says his occupancy rates have plummeted, and in response, so have his room rates: A corporate-rate room is going for $89 to $99 this year, compared to the former price of $119 to $129.

Says Abrams of the state lodging association: “People are very nervous about the economy, so businesses are spending less to travel. They are sending fewer people on business trips and are doing more telecommuting. Even the government is cutting back on travel at all levels.”

To compound the problem in the Capital Region, new business hotels are still popping up. In the past 18 months, 11 new hotels have opened in greater Sacramento, according to the Sacramento Convention & Visitors Bureau. Nearly 1,000 rooms are currently under construction at seven new properties, and 12 more projects with an estimated 2,250 rooms have been proposed.

In the past six years, nearly all of the counties in the Capital Region have added hundreds of new hotel rooms, according to data from Smith Travel Research. Sacramento County led the pack with the addition of more than 2,000 new rooms between 2003 and 2007, while most other counties added between 300 and 600 rooms.

El Dorado County was the one in the bunch to decrease its number of hotel rooms. Smith Travel Research documented 6,596 rooms in the county in January of 2002, but just 5,062 at the close of 2007.

Down in Elk Grove, Singh can attest to the business climate. “There is a lot of competition in this region with new hotels, and that stretches us with our rates. Within a 1.5-mile radius of our hotel there are three others and The Hilton Garden Inn is coming up any moment now,” Singh says. “At one point Elk Grove was booming, but it’s stalled. A lot of businesses have closed, but despite that, hotels are building. Let’s be frank; this is all negative, and new hotels don’t help.”

Though new hotels continue to sprout, data from Smith Travel Research suggests declining occupancy rates across the region. Not a single county in the 10-county Capital Region maintained occupancy levels between 2006 and 2007 — most declined around 3 percent. Nevada County was hit particularly hard with an occupancy decline from 61 percent in 2006 to less than 57 percent in 2007.

Unfortunately, 2008 isn’t looking up either. The same sets of data show occupancy declines in the first quarter this year compared to the same period last year. To maintain whatever fraction of the market they might be holding, hotel chains are now beefing up amenities, promotions and incentives.

The Red Lion Hotel Sacramento at Arden Village is currently in the throes of a $28 million expansion and revitalization that is expected to elevate the 1960s property from its current lackluster state, to a five-star entertainment and wellness destination.

“We’re remodeling to take it back to the ’60s, so there will be very clean lines and kind of a retro look to it. We’re tearing down 100 rooms and building 120,000 feet of new commercial space with our anchor as Lucky Strike Lanes. We’re going for more of a resort-type feel with an amphitheater for concerts in the middle of the property,” says Jeff Berger, president of University Capital Management Inc., the project’s overseer.

The Red Lion’s new old-school look will be unveiled in October and targets local guests as well as out-of-towners with its inclusion of new restaurant options and businesses that will likely include a cosmetic surgery office, beauty salons and a health club.

“A gallon of gas is now $4, and a lot of hotels are dependant on the drive market — people who aren’t flying,” Abrams says. “The cost of gas is going to have a major impact, so more and more hotels are getting creative and reacting.”

Some hotels are offering prepaid gasoline cards, and others are extending cash bonuses or reduced room rates to guests who drive a hybrid vehicle or use public transportation. At the Holiday Inn Sacramento Northeast, members of the American Automobile Association receive a $25 gas card for each night they stay. Meanwhile, corporate and group rates are also changing: Chain hotels are offering double or triple reward points, and events such as weddings, graduations and birthdays are now enough to reason to offer deeper discounts.

“Summer season is peak season for sports, so we do special negotiated rates for sports teams,” Singh says. “They always look for breakfasts in the mornings, and we do deluxe continental with hot items. That can get the sports teams in because its not just pastries and coffee.”

Still, other regional hotels, such as the new Citizen Hotel on 10th and J streets, report less of a concern about the current economic environment. “We’re an upscale business hotel. We are a boutique hotel designed for this location, market and traveler that wants a unique experience,” says the hotel’s managing director Brian Larson.

The 14-story hotel, which is slated to open in November, targets the political and entrepreneurial class — guests who demand more than complimentary shampoo and expect swank chairs in which to sip a high-end scotch.

“A lot of the business conducted here [in Sacramento] is still related to the government, and when the economy is bad, there are still people coming here,” Larson says. “Revised legislators will be taking office soon, and new leadership relationships need to be forged, so we are very confident that Sacramento will continue to see slight growth in demand, and we think we’ll do well.”

It helps that the Citizen has little direct competition. Of the recently built or proposed hotels locally, just one — the proposed 192-room Capitol Grand Tower Hilton Garden Inn — has been marked for downtown.

Plus, the Citizen is at a luxury price point while other area options tend to be value-oriented, Larson says. The proposed Hilton would hit closer to the mark, but even then, the Citizen maintains a different, more charismatic personality than its cookie-cutter competition, he adds.

What’s more, some industry pundits suggest the demand for luxury hotels is not as affected by the economy as other hotel categories. “Our clientele, as a four-star boutique hotel, is usually more concerned about whether they have the time to get away, and not the price,” says Judith Bommer, owner of the Amber House Bed & Breakfast in downtown Sacramento. “I haven’t really seen anything to worry about with the economic decline. Our numbers are still pretty much the same.”

Hotel managers in Napa and Sonoma echoed her sentiment, noting the insulated affluence of their visitors. In March, U.S. luxury hotel occupancy averaged 72.2 percent, the best in any hotel category, according to Smith Travel Research.

“It’s really impossible to know where this is going to balance out,” Abrams says. “Because of the dollar, people are staying home more, but people are coming here [from overseas] with higher frequency. That said, we are a better value now than we have been in many years.”

And that value, he says, is key. “I don’t think there is anything going on that should systemically change how you go about [planning your stay],” Abrams says. “People always ought to be asking about discounts. Hotels will be honest; people ought to do their homework and ask about the cheapest rates available and not just take the rack rate.”

*This story was originally published in the July issue of Comstock’s magazine. http://comstocksbusiness.com/