Coming out of the planning commission meeting, it was obvious that there is serious neighborhood concern regarding the location of the proposed Hyatt House hotel. The interesting dynamic was that there was almost an equal number of people speaking up on Wednesday that we need a hotel for city revenue and to support existing and emerging businesses.
The response of the neighbors was simple – all of that is true, but that truth holds no matter the location of the hotel. That said, given how quickly and how hot this issue has burned, it might be worth resetting the discussion away from land use concerns and toward fiscal concerns.
While the city needs to figure out sources of tax revenue, it is important to understand there is considerable difference in four different analyses of the impact of additional hotels on the Davis city fiscal system.
The PKF Consulting study represents one of the more optimistic views on market demand. They believe that building the Embassy Suites with additional rooms and also 18,000 square feet of meeting space “would likely require additional guestrooms than what would be offered at the Embassy Suites, thus requiring additional, conveniently located hotels to accommodate this overflow demand.”
They find that 18,000 square feet of meeting space could include between 500 and 1000 attendees, depending on the type of function. “A hotel with approximately 18,000 square feet of meeting space would typically feature between 350 and 400 guestrooms,” they note. But the Embassy Suites will have just 132 rooms, which means that Davis will need other hotels to complement the Embassy Suites in order “to capture either overflow group demand that is booked at the Embassy Suites (but can’t be accommodated).”
PKF argues that at least three new sites can be “readily absorbed by the market,” and they find “occupancy is projected to increase to 67.0 percent in 2019 and further increase to approximately 70.0 percent in 2020 and 2021. It is at this level we project the Davis hotel market to stabilize. While this stabilized occupancy level is above the annual average occupancy level achieved by the Davis hotel market since 2007, it is in line with the year-to-date performance and is reflective of the growth occurring in Davis.”
Based on these projections it was projected that four new hotels could ultimately generate between $1.5 and $2 million in new revenue for the city just by themselves.
In January, the Vanguard met with existing hotel owners who are skeptical of these claims from PKF, and point to their own analysis that paints a very different picture.
They note, while the occupancy rate has increased from 61 percent in 2012 to 67 percent in 2014 (the most recent data available), the rate varies by day and month. Basically, from Sunday through Thursday, hotels have trouble booking rooms, and it is only on the weekends, mainly Friday and Saturday, where hotels approach 70 to 80 percent capacity.
But even these are variable, depending on the time of the year, with the summer months generating heavy usage that falls way off during the late fall to early spring. In essence, there are only about five times during the year when the market is saturated: when UC Davis opens, Picnic Day, and during three separate graduations – in the spring, fall, and for the law school.
The analysis notes that coupling additional hotels with the already-approved Embassy Suites would add about 328 rooms to the market that would have to be absorbed – the existing hotel owners do not see the demand generators at this time to justify that belief.
The PKF model suggests an industry that would grow from roughly $17 million a year upwards to $40 million by 2021. However, the existing hotel owners presented to the Vanguard what they consider a more realistic projection, which would be five percent growth, which is keeping more with historic revenue growth, and the hotel industry would move from just over $17 million up to $25 million by 2021. Even that growth rate, some say, is optimistic.
The premise of the PKF study is that there is leakage from Davis to surrounding cities like Woodland due to lack of supply. The statistics suggest otherwise, the hotel owners argue. Right now, Sunday through Wednesday is dead. If there are days of leakage, perhaps Friday and Saturday are those days, but, most of the time, those days are averaging at most 80 percent occupancy rates during peak months.
There are perhaps five days a year when there is leakage to other cities, but that is not sufficient to justify the proposed increase in rooms PKF is suggesting.
The city contracted with HVS Consulting & Valuation in order to get an independent assessment of the hotel market demand.
As staff notes, “HVS analyzed scenarios for hotel development in Davis, with the existing room supply and the addition of Embassy Suites as the baseline. Impacts of adding additional hotels were projected. HVS concluded that the near-term development of a conference hotel facility with the addition of an extended stay hotel to be built shortly thereafter would be most beneficial to visitors, the City of Davis, other hotels in the market, and the overall community.”
However, HVS concluded “that the addition of another hotel, specifically another extended-stay facility, would not benefit the market for another four to five years after the initial extended-stay hotel has opened.”
The HVS report analyzes the study performed for the Hyatt House, noting, “Based on the forecast, occupied room nights will have to increase by 40% over a two-year period to sustain a 65–66% occupancy level. Those figures are somewhat extraordinary, especially for a market that has yet to surpass 70%.”
They note that “it is likely that those occupied room nights will come from induced demand associated with the Embassy Suites and unaccommodated demand from those who would like to stay in Davis, but the types of accommodations desired do not exist or are sold out. Furthermore, the projected (2015–2021) compounded annual growth rates for the previously described metrics are higher in all categories when compared with those achieved between 2007 and 2014. Although the stabilized level of occupancy for the Davis market appears somewhat robust, it is clear that there are significant levels of unaccommodated demand in this market.”
However, HVS adds that “although projected to be higher than historically achieved in the analysis completed by PKF, it is reasonable to assume that the entry of branded, high-quality hotels would have a positive impact on the rate structure of the market as a whole.”
HVS concludes that these projects “appear slightly aggressive but not entirely unreasonable.”
City staff writes, “Staff accepts the analysis that shows that construction of one extended stay hotel in Davis would benefit the City and the market by capturing room nights from visitors who are going elsewhere because they are seeking either amenities or a hotel brand that is not available here.”
“Additional rooms in an extended stay hotel could also complement the hotel conference center by accommodating overflow guests, provided there are mechanisms to address inefficiencies of shuttling meeting-goers,” staff adds.
However, staff concurs “with the HVS conclusion that there is not current capacity to absorb the rooms proposed for both the Hyatt House and the Residence Inn if they were to open within the same period of time.”
This analysis has led at least some to conclude that the best approach would be for a consideration of both proposals at the same time. That is probably more appropriately an issue for the council rather than the planning commission to consider.
Questions that the council should address are:
- What are the short-term and long term needs for hotels in the community?
- What is the likely revenue generation of a single hotel and both hotels?
- Do we need one additional hotel or two, or should the council even weigh in on that issue?
- If the council does believe we need one rather than two (or zero), which one is the better location?
—David M. Greenwald reporting