Does Your Hotel Really Need a Brand?

IRVINE, CA—Many owners are questioning the necessity of hotel branding now that getting the best price is more important to guests than loyalty programs are, Atlas Hospitality's president Alan X. Reay tells GlobeSt.com exclusively. We spoke with Reay as he was preparing to moderate a CREW-OC panel titled “Heating Up: A Hospitality Story” on April 22 at the Pacific Club in Newport Beach, CA, about trends he's seeing in the hospitality industry, particularly in Orange County. To register for the panel, click here.

GlobeSt.com: How do you view the hospitality market in Orange County as compared to other California markets?

Reay: If we look back in terms of the downturn and the recession, Orange County probably weather that storm almost better than any other area in California. Orange County is a lot more diverse economically in comparison with other counties, including tourism and other industries. As we've come out of the downturn, of course we who live here love Orange County, but it also has a lot to offer from theme parks like Disneyland and Knott's Berry Farm and more than 42 miles of scenic coastline. In 2014, Orange County saw in excess of 45 million visitors, and they spent more than $10 billion here. In regard to the economic base of Orange County, obviously tourism is a big driver, and the weather is a big plus.

Also, the amount of money being invested into Anaheim, not just the theme parks but also the Convention Center, is an extreme draw, specifically from a hotel standpoint. Orange County, specifically the Newport Beach/Dana Point area, rated number four in the entire state for RevPAR in 2014 at $140. Santa Monica was $230, followed by Napa and San Francisco. It's a good measure of how strong a demand we have for hotel product. Obviously, Newport Beach and Dana Point have coastal resorts that drive the high rates. This translates to hotel sales: for a very short while this year, this area had the highest price paid per room of any hotel in California—$1.4 million per room for the Montage, which surpassed the Hotel Del Coronado in 2007 at $1 million per room.

GlobeSt.com: What do you expect to see with regard to hotels for the rest of this year?

Reay: The one word that summed up 2014 is record: record number of sales transactions, prices, dollar volume and increases in RevPAR. We're obviously coming off a very strong year in 2014, and we see it increasing in 2015, although not at the same pace as the last couple of years. But with the business that's on the books, projections in terms of future reservations, the prediction is that RevPAR will increase by 6% or 7% in Orange County this year, which is still heavy. Last year, RevPAR growth was between 11% and 11.5%, which was still strong. Overall, for Orange County, I definitely see an increase in RevPAR, which means consumers are still going to be paying more for their hotel rooms this year.

I also see a tremendous amount of buyer interest. This is across the board in real estate, but specifically in the hotel industry. There's a lot of interest from overseas investors, particularly in Asia, and lack of supply for sale and the number of buyers will inevitably push up prices. Higher prices mean there's more interest in new construction and development, and we're seeing that in Anaheim and in other parts of Orange County in and around the John Wayne Airport area.

GlobeSt.com: What other trends are you noticing within this sector?

Reay: Some of the trends we're seeing and have to be mindful of are not only in Orange County, but throughout the industry. One is the Airbnb explosion and what effect that will have on the whole industry. San Francisco is the first city that is starting to monitor that and measure how much money is going into it.

Another trend is the growth of Millennials and its effect on the hotel industry, which ties in with many major brands coming out with lifestyle brands specifically targeted at Millennials. There is a new AC boutique/lifestyle hotel planned at Michelson and Jamboree—AC is the boutique brand for Marriott—that was originally planned to be a Ritz Carlton. The lifestyle brand means getting away from checking in and going to your room, but rather hanging out in the lobby or bistro bar and interacting with other guests.

Technology is also a part of this: the JW Marriott in Downtown L.A. has a 17-minute short film on YouTube selling the Marriott brand. Hotel companies are moving away from traditional advertising media like brochures and TV and moving over to other media that are more closely aligned with Millennials. And Hilton and Starwood allow guests to use their iPhones to access their rooms and open the door.

On the old-world side, we're seeing a lot more new construction. When existing hotels were selling well below replacement costs, it didn't make sense to go out and build, but they're now selling at or above replacement cost, and this is priming developers and lenders back into the market in a big way. We're seeing a lot of new plans and proposals for new construction, and we're seeing some projects actually breaking ground, which pushing existing hotel product to renovate and update. There's a tremendous amount of capital going in to compete with new product.

There's also a lot of talk about how valuable the brand is. We're starting to see independents come into their own, which raises the question of, “Do I need a brand on my hotel or can I survive on my own?” In markets like Laguna Beach and Napa, you don't need a brand, but branded hotels make a whole lot of sense in downtown and highway locations. Some owners have decided to go without a brand or to drop the brand and go independent, and some of them are successful while others are struggling.

From an economic standpoint, the strength of the US dollar brought a tremendous number of international visitors to the US last year. The US dollar has climbed precipitously compared to foreign capital. Also, local ordinances have placed a bull's eye on the hotel industry from a minimum-wage perspective. We've seen this in LA, Long Beach and Seattle: the hotel industry is being carved out and targeted as an industry in which to raise the minimum wage. It's an easy target because most people staying in hotels are out of town, and it doesn't really affect local people, but hotel owners are cognizant of it and wary of it.

GlobeSt.com: What can attendees expect to hear at the CREW-OC panel you're moderating on April 22?

Reay: We will have pretty broad coverage of where we are at in the cycle and where we've come from since 2009 and 2010. We had as much as a 40% to 60% drop in values of hotels from the peak of 2007, so we'll be looking at where we are now and what clouds might be on the horizon. We'll be talking about hotel investors, who they are and where they are coming from, as well as what's going on with financing—how are the rates and how easy is it to get? We'll also tackle the availability of EB-5 funds, which is very important for California and almost exclusively used up by Chinese investors—less so in Orange County, but we're starting to see it a lot more.