April 7, 2000

There's too much room at the inns

SALT LAKE CITY (AP) -- A word of advice to hotel owners: If you build it, they might not come.

Hotel occupancy rates are plunging across the country, and about a dozen markets -- including Salt Lake City, where hotel business was expected to blossom in anticipation of the 2002 Winter Olympics -- are seeing room prices drop as well. That's bad news for hoteliers and their bankers, especially as they watch shiny new towers spring up like weeds.

"Right now if you call a lender and say you want to finance a hotel you'd better have a great second sentence," said F. Scott Tonges, regional hospitality manager for Grubb & Ellis in Albuquerque, N.M. "Because they are going to hang up in most cases."

Five years ago it was just the opposite. Bankers and other lenders, flush with stock profits, were hungry for new projects.

Hotels looked like a safe bet. Business travel was booming along with the hot economy, and Americans were spending more on vacations. Some hotels built in the last big boom, during the 1980s, needed to be upgraded.

But developers got ahead of themselves.

"I think hotels, like any commercial real estate project, go through cycles," said Samuel Jeppson, First Security Bank's president for commercial real estate. He said it appears Salt Lake City's supply of hotel rooms is getting ahead of demand.

Occupancy rates nationwide fell from 72.5 percent in 1998 to 71.4 percent at the end of last year, according to PKF Consulting of San Francisco. Some of the biggest drops were: Boston (8 percent), Seattle (7.2 percent), and Dallas/Fort Worth (6.8 percent).

On average, room rates increased by almost 2 percent, from $114.63 in 1998 to $116.79 in 1999. But 11 cities in the West and South saw rates decline along with visitors.

Take Salt Lake City. It was considered underdeveloped at the end of 1994, when there were 8,183 rooms at hotels with 50 rooms or more, according to Colorado consultant Jim Hire, who publishes the Rocky Mountain Lodging Report.

But quick economic growth and the excitement of winning the Winter Games in 1995 had investors jumping in with both feet and open wallets.

By the end of this year -- with the completion of a new 370-room Marriott downtown and the 700-room Little American Grand -- there will be 14,568 rooms in the Salt Lake Valley.

"It's the old economic law of supply and demand," said Rick Davis, president of the Salt Lake Convention and Visitors Bureau. "If you increase supply by 70 percent you have to increase market demand by the same rate. Otherwise you see occupancy go down and competition go up and rates go down, and that's exactly what we've seen happen."

Occupancy rates for the city peaked at an unusually high 80.5 percent in 1996, and slid to 65.4 percent last year, according to Hire's report. He projects that rates will drop to 61 percent by the end of this year and as low as 58 percent in 2002.

At the same time, room rates are also falling, from a 10 percent increase in 1996 to a 5.5 percent drop last year.

That could make it tough for some hotels to survive.

"Those which are not well-located or not well-managed are going to end up losing quite a bit of money," Hire said. "Properties that are well-maintained and well-managed will make it but it's not going to be fun."

Those that hold out until 2002 may get a boost. Salt Lake area hotels are expecting full occupancy at peak rates during the 17 days of the Olympics. That could hike average revenue by 15 percent for the year, Hire projects.

But the games may not be the golden goose builders are counting on.

"It's both good and bad," Davis said. "For example, we know from our skier research that more people are coming now because of the Olympics, but when we ask if they're coming in 2001 or 2002, they say `Are you kidding?"'

The same fear of crowds, congestion and poor service the skiers cite may scare off business travelers, Davis said. And with the convention center out of commission for several months to house media for the Olympics, Salt Lake will lose much of its convention market, including its biggest annual show, the Outdoor Retailers Convention.

Davis said Atlanta experienced similar hurdles immediately after hosting the Summer Olympics in 1996.

According to a survey of hotel managers there, room occupancy dipped from 71.2 percent in 1995 to 67.5 percent in 1996 and fell further to 64.7 percent the year after the games. But room rates remained high after an Olympic-year surge and economic development boomed after the high-profile event.

"Generally speaking if you look at the history of the Olympics in a city, there tends to be an overbuilding of the city and the hotels to accommodate the event and some short-term pain and anguish as a result," said Bill Howard, vice president for marketing, tourism and communications for the Atlanta Convention and Visitors Bureau. "For us that did not occur."

Salt Lake officials hope they can lure enough post-Olympic business to say the same. And experts say demand for hotel rooms will probably catch up with supply in five years if Utah's economy stays robust. But for now, there are a lot of rooms that may sit empty until 2002.

"We're approaching a similar situation to the mid-80s when occupancies were down below 65 percent. And back in the 1980s nearly every hotel in Salt Lake went through bankruptcy or an ownership change." Davis said. "This year and next year are going to be very tough in the hotel business."