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Thursday, May 17, 2012
Feature: July 2006
A Dubious Asset
Sacramento’s stable customer base may also be its Achilles heel
Story by Bill Romanelli
Steady as she goes — that’s the description of the Sacramento region’s hotel and hospitality industry today and its forecast for the foreseeable future.
In the region’s favor is a stable base of government business, which can be a dubious asset; a good product mix; a geographically central location; and a quality of life that continues to attract people and businesses.
All of that has led every expert and hotelier to describe Sacramento’s hotel industry as very healthy and poised to enjoy moderate but predictable growth. There are challenges, to be sure, but as ongoing efforts to lure new travelers and businesses to the region bear fruit, the hospitality industry can leverage its strengths to ensure those challenges are overcome.
The health of a region’s hotel industry is primarily measured in three ways: occupancy per night; average daily room rate; and revenue per available room, or RevPAR. RevPAR is calculated by multiplying occupancy by the average daily room rate.
“You can use RevPAR to assess a single hotel or the market in an entire region,” says Alvin Chan, a vice president with PKF Consulting in San Francisco. PKF is an international company specializing in hospitality research.
According to PKF’s data, the national average for RevPAR in 2005 was $71.45; in the Sacramento metropolitan statistical area (Sacramento, Placer and El Dorado counties), RevPAR was $65.96. By comparison, similar markets such as Portland and Seattle had RevPAR rates of $51.80 and $71.15, respectively.
Interestingly, Sacramento’s overall occupancy rate was higher than the national average (72.1 percent versus 67.6 percent), but a lower average daily room rate ($91.48 for Sacramento versus $105.69 for the national average). In short, we’re selling more rooms than most other markets, but we’re selling them at a lower price.
That’s good news from a demand perspective. “When you get above a 70 percent occupancy rate, that shows demand is there, and that’s when people look to build,” says Michael Bullis, past president of the California Hotel & Lodging Association and current president of Destination Properties.
Indeed, demand is fueling the development of several new hotel projects by InterContinental, Joie de Vivre and Residence Inn downtown; Marriott’s trio of proposed hotels at Cal Expo; and the city of Roseville’s pending hotel and convention center complex.
The most desirable customer mix for any market consists of equal parts corporate, leisure and group travelers. How Sacramento’s mix breaks down depends on who you talk to, but the common denominator is that there’s room for more weekend and leisure travel.
“For our hotel, it’s about 40 percent group, 40 percent corporate and 20 percent leisure,” says Liz Tavernesi, president of the Sacramento Hotel Association and general manager of the Holiday Inn Capitol Plaza. “The leisure market is definitely an area where we can grow.”
“We’re very balanced in our portfolio; that’s helped us stay successful even while Bay Area and Silicon Valley cities were struggling in the early 2000s,” says Steve Hammond, president and chief executive officer of the Sacramento Convention & Visitors Bureau. “Currently, corporate business is our largest segment. In the future, we have the opportunity to grow in a significant way, with leisure travelers filling the gaps on weekends and holidays.”
“Of all the California markets,
Sacramento has the most consistent occupancy rate
anywhere.”
— Chip Conley, founder and CEO, Joie de Vivre Hospitality
Chan, however, has a slightly different take. “Sacramento has very strong corporate travel while the Legislature is in session, but around midyear the numbers start to decline, ultimately dropping about five to 10 points,” he says. “Your group and leisure markets aren’t as strong as San Francisco, so it’s going to be tough to get occupancy rates better than the low to mid-70s, but that’s still very good.”
What the region seems to offer most, and with the greatest success, is the limited-service hotel: places like the Hampton Inn and Courtyard by Marriott. Limited-service hotels don’t offer the bells and whistles of full-
service luxury hotels, which makes them attractive to price-sensitive travelers, particularly government workers with per diem limits.
“In place of the features many travelers don’t need, these hotels offer a long list of value-added amenities, like free breakfast and free Internet access,” says Jonelle Norton, CEO of Placer Valley Tourism. “These were once premier options; now they’re standard services.”
Vernita Crews, director of sales and marketing for the Mariott Hotels at Cal Expo, agrees, adding that in addition to offering freebies, hotels are also going back to the basics, such as giving customers a good night’s sleep in a comfortable bed.
That’s certainly a focus of Ulrich Samietz, general manager of the Hyatt Regency Sacramento, who offers a word of caution to his industry colleagues.
“There’s been a significant escalation of amenities, but we can’t forget that we are in a service business,” he says. “Customers are looking for the smile, the recognition and the familiarity that makes their stay pleasant and comfortable. We can’t just assume that throwing more amenities at a guest can be a substitute for that kind of service.”
Due to its proximity, San Francisco is frequently Sacramento’s competitor for hotel business, and the ugly truth is that any comparison of the two cities is, frankly, no comparison.
San Francisco has more and bigger hotel products, including conference space; it’s an international destination; and it was able to take a lot of business away from Sacramento when, following 9-11 and the tech bust, San Francisco could offer it all at a cheaper price.
The good news is that San Francisco has begun to push up its room rates for the corporate traveler, which has helped Sacramento’s group business.
“When business is strong in San Francisco for corporate guests and rates go up, we become the best friend of all the rate-sensitive professional associations,” says Leonard Hoops, vice president and chief marketing officer for the Sacramento Convention & Visitors Bureau. “That also makes those associations the big fish in our pond. They get to come here and ‘own’ Sacramento, which is something they really like.”
San Francisco has also been able to offer a product that Sacramento has not, until now: the boutique hotel. Smaller, more personalized and design-oriented, boutique hotels are created to be more memorable than chain hotels, which can all look alike.
Some Sacramento hotels certainly could lay claim to boutique status, such as the Sterling and some of the bed-and-breakfasts in town, but they have a relatively small number of rooms. A bona fide boutique hotel has a minimum of 30 to 40 rooms, at least according to Chip Conley, who should know: He’s the founder and CEO of Joie de Vivre Hospitality, currently the largest boutique hotelier in California.
Conley is planning to open a 200-room boutique hotel inside a historic 14-story building at 10th and J streets in Sacramento in 2008. His interest in the area says much about the Sacramento market.
“This is a metropolitan market that’s becoming more and more sophisticated,” Conley says. “Of all the California markets, Sacramento also has the most consistent occupancy rate anywhere. It’s not a boom and bust environment; it’s a very good, predictable market.”
“When San Francisco’s rates go up,
we become the best friend of all the rate-sensitive associations.”
— Leonard Hoops, VP and chief marketing officer,
Sacramento Convention & Visitors Bureau
That alone would be enough for Conley to have confidence that a new hotel would be successful here; he says the ability to offer travelers something unique represents a particularly tremendous opportunity.
“There are a number of good hotels in the Sacramento area, but in the downtown core you really only have two and both are branded chain hotels,” Conley says. “The people who visit the Capitol — lawyers, lobbyists, executives and heads of state — are all used to staying in boutique hotels in urban markets. I think most travelers today are looking for a more personalized hotel product.”
Perhaps the most interesting element of Sacramento’s hotel market is that its greatest strength may also be its Achilles heel.
As the main driver of hotel stays, the government sector is largely responsible for Sacramento’s stability, but it comes with a catch: the per diem rate. In short, the government sets a cap on what hotels can charge public employees for a night’s stay. Often, it’s less than the going rate.
With nearly every hotel industry expert predicting a need for higher room rates in the future as construction costs, inflation and other factors weigh in, Sacramento hoteliers will be somewhat stymied. That’s especially going to be a challenge for new hotels.
“The cost of construction is so high that it’s going to require higher room rates over the next few years,” Conley says. “That can be trouble for a region locked into government rates.”
Chan agrees, and points out a concerning fact about downtown hotel development. “There hasn’t been a full-service hotel built here without some sort of government subsidy to help it along because you can’t rationalize the building costs without a room rate higher than you can realistically achieve here,” he says. “That’s why you’re seeing an emerging trend in mixed-use hotel development, with developers including condos or apartments in their hotels to cover costs and help keep overnight rates down.”
The dilemma of higher room rates may not be as big a challenge as it seems, however. Most likely, the higher rates will be the burden of the corporate traveler, and Destination Properties’ Bullis doesn’t see that as a huge threat.
“Eventually, room rates will have to trail off, but for the foreseeable future, higher prices for the corporate traveler aren’t seeming to hurt business,” Bullis says. “As the capital city, people will always need to come here.”
Another challenge facing Sacramento is a lack of room inventory in the downtown core near the convention center, which can limit Sacramento’s ability to compete for convention business. “In reality, Sacramento only has two hotels that can service the kind of groups that want to book into the convention center,” Hoops says.
The new projects coming on line, however, have most local hoteliers singing an unusual tune: competition is good.
“New hotels bring more choices, and that’s what travelers want,” says Gunter Stannius, general manager of the Sheraton Grand Sacramento Hotel. “Plus, higher-end products, like InterContinental and Joie de Vivre, do a good job of marketing themselves. Those efforts are going to make Sacramento even more attractive and bring more business here.”
