Modest Gains Seen Preceding Hotel Recovery

Staff Reporter

After nearly three disastrous years for the local hospitality industry, local hotel operators may finally begin to see a return to better times, according to PKF Consulting's new forecast.

Terrorist attacks, war in Iraq and a deadly viral breakout in Asia all combined to make the last 18 months some of the most trying in the local hospitality industry.

While international tourism from Asia has ground to a virtual halt, a recent rebound in domestic business and leisure travel has given cause for optimism that both occupancy and room rate levels will improve over the next 12 months.

"Corporate travelers are still booking with shorter windows and not quite at the levels previously experienced," said Bruce Baltin, a PKF senior vice president. "However their numbers are noticeably up from earlier this year."

For 2004, PKF projects a 3.2 percent increase in occupancy, to 70.4 percent, still a far cry from the 76.1 percent level reached in 2000, when the market peaked.

While many hotels have seen occupancy edge closer to 70 percent considered the average breakeven point for L.A. County properties the gains have come at the cost of room rates, which fell an estimated 2.6 percent, to $113 a night.

That may change in 2004, as demand and room supply once again come into harmony, according to the forecast. After decreasing in each of the last three years, PKF has forecast that rates could rise 1.5 percent in 2004.

"It's a pretty positive picture out there right now," Baltin said. "This is definitely looking more optimistic than it was mid-year."

Submarkets surge

The greatest activity is expected to come in the Pasadena/Arcadia and Valencia submarkets. In Valencia, where the number of rooms in the market grew by 16 percent in 2003, room rates have already eclipsed $97 a night. Though lower than the county average, the rate compares favorably to the $84.14 reached at the height of the market in 2000.

Meanwhile, Long Beach, which has seen an improvement in the convention business, was expected to finish 2003 with occupancy of 70 percent and an average room rate of $107.48, according to the forecast. For 2004, PKF forecast that Long Beach hotels would reach 72 percent occupancy levels and average room rates would be $110.17.

"Long Beach is on a rising trend as a convention and visitor destination," Baltin said. "It's definitely helped having Jet Blue and American Airlines flying out of the (Long Beach) airport."

Santa Monica, despite suffering a drop-off in international tourists, is projected to end 2003 with 74.3 percent occupancy, the same as the year before. Average room rates are pegged at $194.93, a 2.1 percent year-over-year improvement. In 2004, Santa Monica hotels are projected to reach 75 percent occupancy with $201.76 average nightly room rates.

"There will probably be a little rate increase, which generally happens when there is a better sense of future conditions," said Matt Dinapoli, executive president of Maritz-Wolff & Co., which owns the Fairmont Miramar Santa Monica. "We're all hoping all these better economic conditions will translate into more demand for travel."

Meanwhile, downtown hotels have been left reeling from a steep decline in convention activity, making it one of the worst performing markets in Southern California.

Hotels with rates higher than $85 a night are expected to end the year with 50 percent occupancy about the same as the prior year. Average nightly room rates are projected at $117.44, an 8 percent decline from 2002 levels, according to the PKF forecast.

Wayne Williams, president of asset management firm Williams & Associates LLC, said that without a convention center hotel, winning back significant corporate travel and meeting business could be several years away.

"We continue to suffer from a lack of citywide conventions and meetings due to the lack of a convention center hotel," he said. "Until that changes, we won't be competitive with other nearby convention cities."

But Baltin saw reason for optimism.

"With downtown becoming a more viable residential neighborhood," Baltin said, "tourism should follow as a 24-hour center of activity is created."

Still, the PKF report agreed that without a convention center hotel, Los Angeles will continue to struggle attracting large meetings downtown.

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