Monday Morning Thoughts: A Lot of Uncertainty about Hotel Projects

External view with privacy screen/ rendering by HRGA
External view with privacy screen/ rendering by HRGA

In a little over a week, the Davis City Council will be asked to weigh in on hotel proposals.  The council will be asked to weigh in on whether to approve the Marriott (across the street from Target) or the Hyatt House (along Cowell Blvd), both or neither.

Yesterday’s guest piece by Shane Tucker provided us with a chart to compare the two proposals and, while we can disagree perhaps with some of his categorizations, it at least provides us with a framework for further inquiry.

At the same time, I think it is important not to try to oversimplify the issues.  For instance, as one poster asserts, “Davis can only support one additional hotel now but not two.”

That individual likely is basing that assertion on the HVS Consulting & Valuation report.  The HVS report came out in March, and it 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.”

But it is more complicated than that.  First of all, the HVS report is one opinion.  Others will point to the  PKF Consulting report, which was much more aggressive in its belief that there is a potential for four new hotels that would generate between $1.5 and $2 million in new revenue for the city.

Others argue that even adding one additional hotel is problematic – existing hoteliers told the Vanguard last January they would prefer to see how the market handles the Embassy Suites addition before approving new hotels.  They provided the Vanguard with some rather detailed analysis to back up that claim as well.

In this column I am going to going to question that we really know anything at this time.  The HVS report is based on the assumption that we already have one hotel in the pipeline.

However, as we noted last week, the status of the Embassy Suites hotel is unclear at best.  Michael Harrington and company filed a CEQA lawsuit challenging the veracity of a MND (Mitigated Negative Declaration) designation and the quality of the accompanying traffic report for Richards Boulevard.  In July there was indication that the lawsuit was about to settle, but it has not yet – there are conflicting explanations for that.

In the meantime, there have been questions about whether the hotel’s financing is in doubt – the Vanguard has received mixed reports on that with no official clarification.

At this point, we at least have to ask the question of what happens if the Embassy Suites does get built and what happens if it doesn’t.

As noted, the new Embassy Suites hotel would have 132 rooms and a huge nearly 14,000 foot conference center.  Given that a large conference could generate the need for 300 to 500 rooms, it seems reasonable to see the need for at least one new hotel to accommodate the overflow.

As the PKF Consulting study notes, “A hotel with approximately 18,000 square feet of meeting space would typically feature between 350 and 400 guestrooms.” 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.”

Again, HVS sees a more modest need for hotels.  But what if the Embassy Suites doesn’t get built for another five years?  Can the current market sustain even one new hotel, absent a conference center?

These are critical questions.  It is clear that the city needs at least one conference center.  There is simply a lack of space in the city to accommodate large conferences.  The Vanguard knows this as well as anyone.

While UC Davis has a conference center, and the Vanguard utilized it once, even with the facility itself donated for use by the university, the rules and regulations made the event more costly than off campus.  In the city, unless you want to rent the Veterans Memorial or Senior Center Multipurpose Room, finding space for large gatherings is difficult and those sites are both limited.

As a consumer, I would argue that not only does the city desperately need one hotel conference center, two would probably be well-utilized and become demand generators for more hotel usage.

In the staff report for the Marriott it notes, “This area includes one other vacant parcel that could potentially accommodate hotel or conference center use, subject to property owner interest and City approval of any Conditional Use Permit application. However, no interest has been expressed for hotel development by other property owners in the designated area.”

All of this leaves us with more questions than answers.

If the Embassy Suites hotel does get built – do we need one or two hotels to support?  HVS argues we need one, but the PKF Study argues we need more than that, and the existing hoteliers want us to wait until we see where the demand generation goes.

If the Embassy Suites hotel does not get built – does that mean we need two hotels to compensate for the loss of the Embassy Suites or does that mean we need none since we won’t have a conference center to generate new hotel demand?

Finally, if Embassy Suites does not get built – can we finance another conference center?

The key considerations at this point are: where does the Embassy Suites project stand?  Do we need zero, one or two additional hotels?  Is an additional hotel viable without a conference center?

For me, the bottom line is to stop making assertions that we know how many hotels we need – I have walked through the numbers from PKF, HVS and the existing Hoteliers and my conclusion is that all of them have a point and we simply don’t have a good answer, especially in the face of uncertainty at this time.

—David M. Greenwald reporting

About The Author

David Greenwald is the founder, editor, and executive director of the Davis Vanguard. He founded the Vanguard in 2006. David Greenwald moved to Davis in 1996 to attend Graduate School at UC Davis in Political Science. He lives in South Davis with his wife Cecilia Escamilla Greenwald and three children.

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42 Comments

  1. Frankly

    The dichotomy just continues to amaze me.

    On the one hand there is every indication that the standard NOE Davis voter is incapable of any rational consideration of any new development project.  And it is clearly a city full of voters and activists lacking understanding for how the business world works.

    But here we have them acting as experts in the hotel business.  They of course know better than the actual business people putting their own capital at risk.  They are all math and facts here… nothing emotional.

    And as usual, they are aided and abetted by the existing business owners who have no conflict of interest for opposing competition.

    What a foolish little city we live in.

      1. Alan Pryor

        …the standard NOE Davis voter is incapable of any rational consideration of any new development project.

        Oh yes, for sure…we should certainly just rely on only the YES pro-development folks in town to make informed development decisions for us. Since developers and their financiers will have actual money at risk, they inherently must be smarter and more honest and more caring about the community than those damn NIMBYs.

        Oh wait a minute…it was these same YES idiotic and crooked developers and financiers  who gave use the real estate bubble in 2008…never mind!

      1. South of Davis

        Ron wrote:

        > Developers are interested in their own investment, which does

        > not always correspond with the interests of a city.

        Can you name a newer hotel in CA that does not pay a lot of TOT tax?

        If a city wants more tax revenue they should want more hotels.

        Hotel TOT taxes are great for city residents in that almost all of the money comes from people that live outside the city.

        P.S. Bonus points if you can post a link to “any” stories of “strangers” coming to a town and checking in to a Hyatt or Marriott extended stay hotel before they kidnap young gymnasts or creep around the neighborhood “peeping” in to bedroom windows…

        1. Tia Will

          SOD

          Hotel TOT taxes are great for city residents in that almost all of the money comes from people that live outside the city.”

          They are great for those residents of the city who are not directly impacted. Maybe not so great for those who are, especially if they include those who would prefer that we pay more through taxes to support the amenities that we want rather than pushing the payment off onto others.

      2. Barack Palin

        Yes developers are interested in their own investment and that’s why they’re better judges on whether it will be profitable or not than our local citizenry.

        1. Ron

          BP – Yes, for themselves. In general, I’d hate to have developers in charge of planning for the city (as they essentially are in most other valley cities). Even now, they haven’t given up on Davis (as noted via the comments on the Vanguard). The attacks on the “slow-growth” effort will continue, indefinitely. (In fact, it will probably intensify as the economy continues to recover.)

          Of course, they’re not inclined to tell us if their business will cannibalize existing businesses (thereby resulting in no net benefit for the city).

          Not necessarily saying that this is the case, here.

          Overall, it still seems like the Marriott location is a “no-brainer”.  Much better access to the freeway, Target mall, easier access to downtown and the University (avoiding Richards/Olive, as well).  No neighborhood opposition (that I know of).

          Regarding Hyatt, a tougher location, neighborhood opposition, perhaps insufficient demand (benefit to the city) to override those concerns.  Seems like there’s conflicting information regarding the level of demand for two – three additional hotels.

           

        2. Chamber Fan

          Also you are missing something else Ron, it’s not just developers involved, but backed by the hotelier, so they have a vested interest in having a successful product.

        3. Ron

          Chamber Fan:

          In general, I’ve already addressed developers’ inherent lack of interest in (overall) impacts, for the city.

          Regarding slow-growth in general (not necessarily related to the hotel proposal), at some point you’re either for it, or against it (to paraphrase George W.).  But, there will always be those who try to emphasize an “internal need” that requires yet another “exception”.  The same type of arguments were made regarding Covell Village.

          Pro-development types have a vested interest in trying to convince everyone that there’s a “problem” that needs to be solved via more development.  (Despite the fact that prior development hasn’t “solved” the perceived problem, to say the least.)

          But to say that I don’t appreciate and admire the skill of those who design and construct developments is not accurate.

          It seems that this battle will continue indefinitely, or at least until we all realize that endless growth/development cannot continue, indefinitely.

           

        4. Matt Williams

          Ron said . . . “It seems that this battle will continue indefinitely, or at least until we all realize that endless growth/development cannot continue, indefinitely.”

          Ron, what steps do you think California should take to reduce or eliminate its current level of population growth?

        5. Ron

          Matt:

          If it were up to me (at the national/state level), I’d probably eliminate (additional) tax breaks when having more than two children.  (One idea, at least.) I’d also encourage a conversation, similar to what’s happening with the global warming issue (which is also impacted by endless growth/development).

          However, given the relative lack of leadership at the state or national level, it seems that the “endless growth/development” cycle is (already) being rejected to some degree at the community level.  (Not just in Davis.) Sort of a grass-roots effort, which may ultimately spread to higher levels.

          Perhaps a somewhat similar comparison might be made when examining changes to laws regarding marijuana (another “grass-roots” effort – pun intended).

           

           

        6. Frankly

          If it were up to me (at the national/state level), I’d probably eliminate (additional) tax breaks when having more than two children.

          Nonsensical.

          How many people do you think would change their minds about having another child because they no longer get a tax break?

          If you want to see the birth rate drop in the US, just let Trump build the wall, grow the economy and reform the education system so we have fewer dropouts and fewer illiterate poor.

          But I still don’t know what the birthrate has to do with hotels in Davis.  Is this some cognitive dissonance on display?

        7. Matt Williams

          Ron said . . . “However, given the relative lack of leadership at the state or national level, it seems that the “endless [population] growth” cycle is (already) being rejected to some degree at the community level.  (Not just in Davis.)

          Perhaps a somewhat similar comparison might be made when examining changes to laws regarding marijuana (another “grass-roots” effort – pun intended).”

          Correct me if I am wrong (and I’ve modified your response to focus it on the intent of my question), but it appears you are saying that you support passing laws that will move our country to having no more than two children per couple.  If my reading of your words is correct, there is a substantial difference between the human desire to procreate vs. the human desire to smoke weed . . . and as such I think your grass roots effort comparison is fatally flawed.  Do you really think it is wise to go against the biological imperative to procreate the next generation?

          For the record, I have fathered one child and my one child has fathered no children.  So in my personal life I have walked your talk.

        8. Ron

          Frankly:  “Nonsensical.  How many people do you think would change their minds about having another child because they no longer get a tax break?”

          I was responding to Matt (and earlier, to Chamber Fan).  (That’s how it drifted away from a direct discussion regarding hotels.)  In any case, stabilizing the population doesn’t even seem to be on the radar (yet), at the state or national level. 

          And Matt – you’re reading way more into my response than what’s there. I was simply suggesting that local efforts (in various locales) can often eventually lead the nation, as a whole. (That’s the comparison I was making.)

          Perhaps you’d like to share your thoughts regarding “slow growth” and what it means to you, at some point. And, whether or not the planet can support an ever-increasing population and development.

           

        9. Ron

          Matt:  “Do you really think it is wise to go against the biological imperative to procreate the next generation?”

          Do you mean the desire for sex, or the desire to have offspring?  In any case, I’d suggest that people often make choices to not engage in either of these (goals?) for various reasons, quite often.

          And again, I’d suggest that it’s not wise to support a “goal” of an ever-increasing population (and related development), from any government policy.  Do you disagree?

        10. Matt Williams

          Ron, as I said at the end of my comment above, “For the record, I have fathered one child and my one child has fathered no children.  So in my personal life I have walked your talk.”  How much clearer a statement do you want regarding my personal beliefs about whether or not the planet can support an ever-increasing population. 

          As they say, actions speak louder than words.

        11. Frankly

          I don’t believe in forced artificial scarcity of resources in some mad attempt to reduce humanity.  Scarcity of resources does nothing to control births otherwise we would see the poorest countries have the lowest birthrates and the more wealthy countries cranking out new humans at a record clip.  You must know that reality is opposite this.

          Industrialized and educated societies tend to have fewer children.  Poorer and less educated have greater numbers of children.

          So if your really want to save the world from over population you should be advocating for economic development and education reforms.

          1. Don Shor

            Or just make birth control available to everyone at very low cost and with greater convenience. But I don’t see how any of that is likely to reduce enrollment at UC Davis. As the campus grows in enrollment, demand for housing will continue to increase locally. And enrollment growth also affects the demand for hotels.

        12. Ron

          Frankly:

          By “forced scarcity of resources”, are you referring to the (apparent) preference of Davis residents to limit development (beyond what the market might support)?  In other words, because the nation, state or region is growing (as a result of births and immigration), the residents of Davis should have no say regarding the amount of growth/development?

          Would you also support a “wide-open” border with Mexico, to meet “demand”?

          I’d suggest that communities such as Davis are “leading the way”, regarding a relatively stable population.

          Don – just saw your response, and of course it’s a great idea (greater access to birth control). Also, Frankly is generally right, regarding the relationship between education/wealth, and population growth. However, the United States is somewhat unique among developed nations, regarding the (rather high) amount of population growth.

        13. Frankly

          Interesting… the Freakanomics guys started the dialog on this that Row v Wade reduced crime.   There is also a clear correlation with birthrates and crime.  But then there is also a clear correlation with poverty and crime.  It makes complete sense so it is good that the data support it.

          Teenage birthrates are falling in the US as are general birthrates.  They are falling in Mexico too.  But the US tends to collect the poorest and least educated of imigrants from down south.  So we are getting our birthrates boosted by this while Mexico sheds some of the new kids they would otherwise have to claim as new mouths to feed.

          But none of this has anything to do with development in Davis.  I have written before that I would not support new development for development sake.  In other words, I would not support development that MAKES a need to fill it.  But we are talking about folks like you rejectioning development that clearly fills an existing need.  And your scarcity approach is damanging to many and to the city and is, frankly, boneheaded.

  2. quielo

    Whether there is a market for 2 or 3 hotels is more a question for the developer than some random person in the city. I will note that extended stay hotels with kitchenettes lend themselves to conversion to rental units much more easily than conventional hotels. So if the hotel fails the structure could be converted to a dorm or affordable housing.

  3. Mark West

    The problem I have with today’s article, and the discussion in general, is that we are looking at the problem with the wrong timeframe in mind. From the City’s perspective, the primary reason to expand the hotel capacity in town is a fiscal one, increased revenues through TOT. As has been discussed before, the City has a long-term fiscal deficit, estimated at > $200 million over the next twenty years. We are not going to solve that deficit in the next year or even the next five years, but rather in twenty years or more. Consequently, our solutions need to be considered on that same time basis, twenty years or more. There simply is no controversy over the need for greater hotel capacity in town in that timeframe, both consultants, and the existing business owners, agree on that simple fact.

    Again, from the City’s perspective, the way to maximize revenues from hotels over the next 20 years is to build them as quickly as possible. If we approve both of these hotels and they begin construction within a year or two there will be an immediate increase in revenues of $3.5-4 million from taxes and construction fees. Once in operation, they are estimated to bring in $1 million combined per year in net TOT. Over 20 years (rounding to big numbers) that will result in total revenues to the City in excess of $20 million, or 10% of our projected 20-year deficit.

    If we look at if from the 20-year timeline, there really is no downside from these projects. If the developers have their financing in place and are ready to begin construction, the projects should be approved so that we can begin collecting the additional revenues as soon as possible.

    I will add one last comment here regarding the impact of these new projects on the existing hotel stock in town. The concern has been repeated several times that these projects will negatively impact those existing hotels, with so-called ‘excess capacity’ creating a ‘race to the bottom’ as room rates are discounted in order to maintain occupancy. This argument is simply negated by something that Shane pointed out yesterday.

    “Our downtown hotels/motels are tired, lack appropriate amenities and frankly, suffer from lack of investment, leaving their physical plant and customer service severely lacking.”

    If the existing hotels suffer financially it will be due to their own failure to invest in updating and improving their physical plant and customer service, not from the added competition. Competition benefits the City and the marketplace, it is the lack of competition that has created the ‘race to the bottom’ currently being exhibited in our existing hotel stock.

    1. Grok

      Mark is right in his first paragraph. I have no doubt in a 20 year time frame given a growing economy and campus more than one hotel will be needed.

      His second paragraph couldn’t be more wrong. Prematurely building hotels could leave hotels cash strapped and unable to maintain desirable properties. This could possibly even  lead to a hotel converted to other uses before the demand materializes. Maybe it wont be the new hotels that fail, maybe it will be hotels in the downtown that get cannibalized. It would be much worse for Davis if one of the Downtown hotels was lost.

      There is not the rush to build as much as we can as soon as we can that some seem to want. Davis should strive to build the right amount at the right time. obviously that is not easy to predict and there is an aspect of a free market that needs to play out. Staggering the creation of new hotels is the more prudent option.

      It seems people often rush to act as if the hotels being considered now are the only options the city will ever have. Given there have been 3 proposals in the last year, I just don’t think that’s true. There will be more hotels proposed. Maybe the “Hyatt” team can even option a better property and build something similar to what it proposed next to the Rosecreek neighborhood but in a better location.

    2. Davis Progressive

      Mark – not sure I agree with you.  If you build hotels too fast and the market doesn’t match the capacity growth, you risk hotels going out of business before the demand can be generated.  Council is better off building at a rate that the market can accommodate.  You don’t get TOT from empty rooms.

      1. Grok

        DP – Your right on this and said it cleaner than I did. Overbuilding also risks the hotels being unable to invest in maintenance, falling into disrepair and becoming less desirable and thus prolonging how long it takes to generate demand.

      2. Mark West

        DP: “If you build hotels too fast and the market doesn’t match the capacity growth, you risk hotels going out of business before the demand can be generated.”

        According to the consultant’s reports, the current hotel marketplace in Davis is operating at near capacity, yet as Shane points out, many of our current hotels “suffer from lack of investment, leaving their physical plant and customer service severely lacking.” The hotel business is one that requires constant ‘refreshing’ of the infrastructure and customer service in order to remain current with the market demands. Properties that fail to keep up with these changing demands are not being managed properly. If you are not investing in your property during the good times, who’s fault is it when your hotel fails during a more difficult stretch? The competition? I don’t think so. More importantly, any business that requires government protection from competition in order to remain viable is clearly a poorly managed one. I see no benefit to the community in propping up poorly managed businesses.

        The new hotels are both expected to demand higher room rates than most of the existing properties in town. TOT is determined as a percentage of the room rate, so if there is any ‘cannibalism’ of the existing hotels it will be a case of replacing a lower-cost room with a higher-cost one, which results in a net increase in revenue to the City. From the City’s perspective, this type of cannibalism is a good thing. Besides, what is the downside of an existing hotel going out of business?  The property can then be sold to a more competent manager, or be redeveloped and put to a better use than the current run-down and poorly managed hotel.

        “Council is better off building at a rate that the market can accommodate.  You don’t get TOT from empty rooms.”

        Council is better off not trying to predict the market and instead should respond to qualified applicants who are willing to invest their own money into projects that improve the City (and have the financing). You don’t get TOT (or much in the way of property taxes) from empty lots.

        When the hotel market nears the point of saturation, investors will no longer be interested in building new projects. We are not there yet. Understand, DP, we need the new hotels to meet the current demand, not to create it.

        1. Tia Will

          Mark

          Council is better off not trying to predict the market and instead should respond to qualified applicants who are willing to invest their own money into projects that improve the City”

          Again, I am speaking as someone who is not in opposition to these projects. However, in your statement you have made the underlying assumption that these are projects “that improve the city”. You do not seem to be able to appreciate that everyone may not be in agreement with your definition of what will “improve the city”.

        2. Mark West

          “You do not seem to be able to appreciate that everyone may not be in agreement with your definition of what will “improve the city”.”

          You are right, Tia. I don’t appreciate how failing to pay our bills or allowing the City to go bankrupt, improves the City. Nor do I see how increasing taxes on everyone to pay for your lifestyle, pricing young families out of the community, improves the City. Nor do I see how waiting for decades for society to change in order that your ‘ideas’ for addressing our fiscal problems might become viable, improves the City.

          On the other hand, I do see how allowing good companies to open in town, creating jobs and increasing revenues to the City thus helping us address our $100’s of millions in unfunded obligations, will improve the City. Guilty as charged, I guess.

  4. ryankelly

    Maybe we should be considering 3 hotels and then people can oppose the idea and reduce it to just two. Or maybe 4 and then reduce it to 2 or 3.  Maybe even have all of the developers contribute to a fund to pay for the required “settlements.”

    I’m starting to see more negatives about living in Davis, than positives.  Articles like this and the usual commentary tends to contribute to this.

      1. ryankelly

        No, not just one article and commentary.  It’s from an accumulation of many articles, commentaries, letters, Facebook pages, threats, repeated and now expected lawsuits, angry commenters at meetings, elections immediately followed by condemnation of office holders, resentment and anger directed toward UCD and the students who come to town to attend college, etc.  Then the physical environment – decaying roads and bike paths, dying trees and weed-strewn parks and school yards, empty storefronts in downtown and neighborhood shopping centers, and the repeated tax measures we have to pay to maintain things even at this poor level.

         

  5. Tia Will

    Frankly

     I have written before that I would not support new development for development sake.  In other words, I would not support development that MAKES a need to fill it.:

    If this is true, then I would think that you would be not be a proponent of  projects such as Trackside. There is no demonstrable “need” for a luxury apartment building in a transitional neighborhood. At most, one could make the claim that it would be a “nice to have” for those already affluent enough to afford it and for its investors who are clearly not in “need”.  It will not provide housing for those in real need such as students, low wage earners, or the homeless. It will not provide a substantial contribution to city revenue. And, as you have pointed out to me several times, will essentially be materially insignificant for those of us not immediately adjacent to it. And yet you have steadfastly supported this “development for the sake of development”.

    1. quielo

      It will provide customers for downtown businesses. Perhaps you should ask the merchants and entertainment venue owners and workers whether they would prefer a luxury development or “needy” people, or do they not count?

    2. Frankly

      There is a need for adding to the housing supply.  Adding to the supply diversity reduces competition for other scarce housing resources that then support capacity for other housing needs.   Trackside isn’t “luxury” apartments any more than my recently remodeled 1800 square foot 3/2 house is luxury.  Your labeling it that is simply oppositional hyperbole.

      There is a HUGE need for more housing and so adding housing helps fill the need.  Who do you think would move to those apartments once built?

      1. Mark West

        At six stories, Trackside might have been considered luxury apartments, at least for Davis. When the neighbors demanded the reduction in height, that also cut out the funding for the underground parking, smaller building footprint, and higher quality amenities in the design. In short, reducing the potential revenue from the project forced a reduction in many of the ‘quality living’ aspects of the original design, turning ‘luxury apartments’ into more generic ones.

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