Commentary: Hotels Represent Just the First Step toward Fiscal Resiliency

Residence-Inn

It is perhaps not ironic that the short discussion on Tuesday night focused on sustainability rather than revenue, but it is interesting that the Marriott Residence Inn being able to check off the LEED gold certification was the step that allowed the council to support the otherwise non-controversial hotel at the intersection of Mace and Second Street.

It was a 4-0 vote because Rochelle Swanson, erring on the side of caution, recused herself because she resides within the 500 foot radius of the other, more controversial hotel proposal.  Harriet Steiner, city attorney, reasoned that, because the hotels were linked at one point and because this one is going first, a vote on this might impact a vote on the other.

The quiet passage of the Residence Inn will undoubtedly be in marked contrast to the scene on December 20 when the Davis City Council has to decide the much more controversial Hyatt House Hotel.  In November, the four members of the council showed support for a project there, but decided to give talks another chance to get developers closer to the wishes of neighbors – if that is even possible.

The Residence Inn is expected to bring in $1.8 million in one-time development and construction fees.  A big concern we have seen since the start of the hotel discussion has been the need for the city to capture some of the leakage of hotel stays into neighboring communities.

We have never seen a full quantification of that leakage.  But there is an abiding belief that the presence of modern and new brand-named hotels will generate more stays in Davis.  Matt Williams noted during public comment that the city’s TOT (Transient Occupancy Tax) grew dramatically when UC Davis opened the Hyatt Place hotel a few years ago.

Dan Carson’s analysis suggested that both these projects would provide a net fiscal benefit to the city in the hundreds of thousands, plus one-time benefits of just under $2 million per project.

Mr. Carson believes that the Hyatt House would have a net fiscal benefit to the City of Davis of $650,000 annually, while the benefit from the Marriott would be about $600,000.

Mr. Carson did caution, “As you deliberate about these projects, you will have to weigh the potential fiscal benefits to the city against other considerations, such as your land-use policies and the additional set of criteria you have adopted for such projects.”

While hotels are not going to solve the fiscal woes of the city, a $1.3 million benefit on an annual basis with a nearly $4 million one-time benefit would greatly help the city.

Uncertainty continues to rule on whether the Royal Guest, even with the settlement in their lawsuit, will ever construct a hotel conference center at the corner of Richards and Olive.  Some sources have told us that the conference center portion – which would expect to be a huge demand generator for city hotels – is off the table, but Mike Webb told the Vanguard last week that he could not confirm this.

While this is all a good start, it also represents a drop in the bucket.  With the city already facing hundreds of millions – perhaps as high as $655 million – in unfunded infrastructure needs over the next 20 years, and an increasing annual hit on pensions, the amount of revenue generated by hotels is just the beginning.

As Mayor Robb Davis pointed out, if salaries grow by 3 percent, which is the level that CalPERS assumes and a level that keeps up with a traditional cost-of-living increase, “the pension contributions will require an additional $5.3 million per year.”  That is on a $60 million or so general fund.

Mayor Davis told the Vanguard, “If the average annual General Fund revenue growth of the past 15 years continues for the next five (the 15-year trend is 4.8% per year), fully a quarter of the increases will be consumed uniquely by pension and retiree medical cost increases.”

For Mayor Davis, “while it is true that we are ‘keeping up’ as things stand currently, the cost of ‘keeping up’ continues to grow and that crowds out funding for other projects our community needs to maintain the level of service citizens expect.”

“Something must give,” he said.  “Thus, I am less sanguine than our City staff.  In fact, it is not clear to me at this point how we are going to cover everything over the next five years, given that we are not even covering critical infrastructure backlogs now.”

The council put some of this on the table with the university.  They laid out, in their LRDP response, the need to increase commercial and R&D space within the city.  The council wants to “explore opportunities for City/UC Davis collaboration on how best to gauge and accommodate spin-off business space needs stemming from on-campus research.”

While the city will undoubtedly receive a boost, both from the expansion of Sierra Energy’s Area 52 as well as Fulcrum’s investment in the University Research Park, so far the big scale innovation centers have remained off the radar.

The Mace Ranch Innovation Center, for example, could have generated somewhere between $2 and $7 million annually, in addition to the one-time payout.

Hotels and economic development alone might not generate the kind of revenue we need by themselves.

Mayor Robb Davis said, “I believe we must discuss cost containment—broadly writ—and put a revenue measure before the population in the next two years.”

The mayor said, “It is no exaggeration to say that over the coming 5 years (and beyond) we need an additional $15-29 million each year to cover all these costs combined.”

But a robust economic development plan could cut that necessary cost in half and make the hit to taxpayers more reasonable.

—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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17 Comments

  1. Tia Will

    David

    Hotels and economic development alone might not generate the kind of revenue we need by themselves.”

    My only objection to your article is the use of the word “might” in the above sentence. I think that both your repeated coverage of the economic state of the city, and Mayor Davis’ repeated interpretation of city finances have made it abundantly clear that hotels and economic development alone will not ( no might about it) generate the needed revenues by themselves.

    I agree with the Mayor that what is needed is a three pronged approach with business as a revenue generator, cost containment and revenue generation through taxes. My only quibble here is that I think that we are several years ( or election cycles) behind on the taxation portion of the three pronged approach needed to sustain our city.

    1. Mark West

      “My only quibble here is that I think that we are several years ( or election cycles) behind on the taxation portion”

      That is funny. We are ‘generations’ behind on the economic development prong of the approach, as was clearly spelled out in our current General Plan based on a 1996 study commissioned by the City. We failed to implement the minimal economic development actions specified in the GP, yet have somehow managed to implement several tax increases in that same time period. If you believe that the critical fault is a lack of new tax measures over the past couple of election cycles then I question your support of a balanced three-pronged approach.

  2. Matt Williams

    David Greenwald said . . .  “A big concern we have seen since the start of the hotel discussion has been the need for the city to capture some of the leakage of hotel stays into neighboring communities.”

    Although leakage of existing stays to neighboring communities is a consideration, it is a much smaller consideration than leakage of events due to the fact that scheduling events for the conference/convention space in Davis is limited by the restricted availability of rooms for the attendees of those conferences/conventions.

    Lina Layiktez, UC Davis’ Director of Conference and Event Services testified in Public Comment that she regularly is approached by organizations and groups and associations that want to use UCD’s Conference and Event facilities, who decide against doing so because a substantial proportion of their members/attendees will not be able stay in Davis due to the limited availability of hotel rooms.

    In 2010 the opening of the Hyatt Place added 21% to the available Davis hotel beds and the opening of the UCD Conference Center added 7% to the available Davis conference/meeting space.  In FY 2009-10 the TOT collections were $912,456.  In FY 2015-16 the TOT collections exceeded $1,825,000.  That is a 100% increase in revenues (demand) associated with, and at the same as, a 21% increase in hotel room capacity (supply).  The existing hotels in Davis were the beneficiaries of 58% of that increase and the Hyatt Place produced the remaining 42%.

    If the “lost” conferences Lina Layiktez referenced were able to come to Davis, every 1,000 rooms rented would add an additional 1% to the City’s TOT revenues.  To put those 1,000 rooms into perspective, the Marriott Residence Inn will have 43,800 rooms available to the public each year (120 times 365).

     

  3. RoshanPatel

    Mr. Williams, I respect the fact that you have taken the time and effort to take a look a the hotel market in Davis, CA. However, I cannot follow your logic.

      In FY 2009-10 the TOT collections were $912,456.  In FY 2015-16 the TOT collections exceeded $1,825,000.  That is a 100% increase in revenues (demand) due to a 21% increase in hotel room capacity (supply).  The existing hotels in Davis were the beneficiaries of 58% of that increase and the Hyatt Place produced the remaining 42%.

     

    Can you please explain this in greater detail. I am a local hotel owner in Davis, CA and really can’t grasp what you’re trying to say here.

    TBH, the HVS Demand Study commissioned by the City was probably dead-on, in terms of hotel demand in our market. I don’t see why we need to have citizens or the Council question it. Not to be disrespectful, but who are you to question a HVS hotel consultant?

    I’ve learned many people including our City Council read the comments on this website so I’d really appreciate if someone is going to try to put out numbers and figures concerning hotel demand in this City – it should be clear, concise and truthful.

    In any case, I’d love to hear in more detail what you’re referring to when you talk about this 100% increase in TOT in 2016 was caused by a 21% increase in supply back in 2010. I hope you understand the addition of the 75 room Hyatt Place in 2010 knocked the Cities TOT back down to 2002 levels … so a 100% increase in TOT after 6 years of the Hyatt Place hotel being introduced in this market is not exactly a crazy achievement. Also coupled with the fact that probably every single city in California has seen a relatively similar increase in TOT in that same period of time (if not more).. really assures me that the Hyatt Places addition of rooms in 2010 – Is not the reason why our TOT has grown 100% in the past 6 years… probably has to do more with our overall recovery of the leisure travel and commercial travel segments.

    Also, I hope you understand that TOT increases and decreases do not just correlate with demand for our hotel rooms. The fact is; our large increases in TOT the past year have come way because of our RATES are growing not necessarily demand.

    There’s some type of correlation out there in this community that correlates more hotels rooms with more TOT. That just cannot be further from the truth. For example, the City of Calistoga has 490 hotel rooms and it’s TOT income was 5+M this past year… TOT is driven by demand and by rates.. not by a number of hotel rooms the City has. Hotels are not magic TOT generators.

    1. Matt Williams

      Roshan, thank you for your considered response.  I will provide responses to your key points here, but also invite you to call or e-mail me so that we can sit down in person and review the public record information that is the content of what I have shared.

      First, let me address your point and question, “I don’t see why we need to have citizens or the Council question it. Not to be disrespectful, but who are you to question a HVS hotel consultant?”

      I am a member of the City’s Finance and Budget Commission (FBC).  The reason FBC is looking at the City’s hotel TOT revenues is that it is a significant component of the City’s fiscal picture. Item 7 of the September FBC meeting covered the two Hotel proposals.

      Several challenges were identified in the discussions.

      — First, there are two separate HVS reports.  One can be accessed at http://documents.cityofdavis.org/Media/Default/Documents/PDF/CityCouncil/CouncilMeetings/Agendas/20160315/08-Hotel-Market-Analysis.pdf  The other can be accessed at http://sustainability.ucdavis.edu/local_resources/docs/onlinedocs/hotel_expansion/Hotel_Impact_Study.pdf

      — Second, neither of those reports include the TOT revenues received by the City of Davis.

      — Third, the supply and demand volumes in the two reports do not correspond.  The 2016 HVS report shows the following annual supply numbers

      _____ Average Daily _ Available
      Year _ Room Count _ Room Nights
      2007 ___ 381 ________ 139,065
      2008 ___ 381 ________ 139,065
      2009 ___ 394 ________ 143,810
      2010 ___ 457 ________ 166,760
      2011 ___ 469 ________ 171,185
      2012 ___ 455 ________ 166,075
      2013 ___ 455 ________ 166,075
      2014 ___ 499 ________ 181,987
      2015 ___ 506 ________ 184,810

      While the 2011 HVS report shows the following annual supply numbers

      Year ___ Rooms _____ Available
      2000 ___ 541 ________ 197,340
      2001 ___ 564 ________ 205,860
      2002 ___ 564 ________ 205,860
      2003 ___ 564 ________ 205,860
      2004 ___ 564 ________ 205,860
      2005 ___ 564 ________ 205,860
      2006 ___ 564 ________ 205,860
      2007 ___ 564 ________ 205,860
      2008 ___ 564 ________ 205,860
      2009 ___ 577 ________ 210,605
      2010 ___ 640 ________ 233,555

      The overlap years of the two reports 2007, 2008, 2009 and 2010 are substantially different.  As a result we sought out objective fiscal data, preferably from an audited/auditable source.  We found that source in the audited financial statements of the City of Davis, specifically the annual TOT revenues receipts.

      Second, let me address your point “I hope you understand the addition of the 75 room Hyatt Place in 2010 knocked the Cities TOT back down to 2002 levels”

      In Fiscal Year 2007-2008 the total TOT receipts received by the City from the 604 hotel beds in Davis were $1,120,983.  The Hyatt Place was not open at that time.

      In Fiscal Year 2008-2009 the total TOT receipts received by the City from the 604 hotel beds in Davis were $1,031,031, a decline of 8% due to the early effects of the Recession.  The Hyatt Place was not open at that time.

      In Fiscal Year 2009-2010 the total TOT receipts received by the City from the 604 hotel beds in Davis were $912,456, a further decline of 11.5% due to the continuing effects of the Recession.  The Hyatt Place was not open during the first nine months of that period.  When it was open for the final three months of that period, the City received no TOT revenues from the Hyatt Place, because it is not within the City Limits.  All the Hyatt Place TOT revenues go to Yolo County.

      The first full year the Hyatt Place was open, Fiscal 2010-2011, saw the total TOT receipts received by the City from the 604 hotel beds in Davis rise 5.0% to $958,434.  They were not “knocked back” at all.  They increased.

      The second year the Hyatt Place was open, Fiscal 2011-2012, saw the total TOT receipts received by the City from the 604 hotel beds in Davis rise another 9.6% to $1,050,157.  Again, they were not “knocked back.”  They increased.

      The third year the Hyatt Place was open, Fiscal 2012-2013, saw the total TOT receipts received by the City from the 604 hotel beds in Davis rise another 36.7% to $1,436,067.  Once again, they were not “knocked back.”  They increased … this time dramatically.

      The most recent year, Fiscal 2015-2016 saw the total TOT receipts received by the City from the 604 hotel beds in Davis rise another 36.7% to $1,445,819. That represents an aggregate 58% increase in TOT revenues for the City over the $912,456 of the base year Fiscal 2009-2010.

      In addition, above and beyond the City’s TOT receipts, Yolo County has seen its TOT receipts from the Hyatt Place rise from $0 to over $380,000 in Fiscal 2015-16.

      When you add the City TOT and the County TOT together the base year Fiscal 2009-10 TOT revenues of $912,456 have risen to over $1,825,000.  That is more than double (an over 100% increase).

      Third, let me address your point if someone is going to try to put out numbers and figures concerning hotel demand in this City – it should be clear, concise and truthful.”

      I completely agree, and the following statement from Table 5.1 of the 2016 HVS report “Please note that the 45-room University Park Inn is a non-reporting property and the 78-room Days Inn and the 103-room Motel 6 are excluded” illuminates the fact that their numbers are truthful … but incomplete.  Further, the significant discrepancies between Table 5.1 in the 2011 HVS Report and the 2016 HVS Report creates an information disconnect that is neither clear nor concise.

      That is why we went to the clear, concise, complete, truthful and audited numbers in the City of Davis financial reports.

      Fourth, let me address your point I hope you understand that TOT increases and decreases do not just correlate with demand for our hotel rooms. The fact is; our large increases in TOT the past year have come way because of our RATES are growing not necessarily demand.”

      Your comment illuminates a very fundamental rule of microeconomics.  Price (rates) is the result of the realities of the Supply/Demand curve.  The only way that rates can go up is if Supply goes down and/or Demand goes up.  In the Davis hotel market since Fiscal 2009-10 the Supply of available hotel rooms has not gone down, so the only way that RATES can be going up (growing) is if Demand has gone up.

      The TOT revenues numbers show a calculated increase in Demand of 100%.  Increased Demand has produced increases in both the number of occupied rooms and the rate being charged per room.

      I would very much enjoy sitting down with you and digging into the numbers further.  Please feel free to call me at 530-297-6237 or e-mail me at mattwill@pacbell.net

  4. RoshanPatel

    Thanks for your responses Mr. Willams. I would love to meet in person and talk! I’ll shoot you over an email and we can set something up. 

    As for our public discussion: 

     I am fully aware of the TOT taxes that have been collected in the City of Davis for the past 16 years. I am not questioning the amount of TOT that was collected in this City and by Yolo County, I am aware they have been increasing overall the past 6ish years besides FY 13-14 and I believe FY 14-15 .. which for some reason you leave out on your analysis. My original question or rather a concern was in regards to your statement: 
      In FY 2009-10 the TOT collections were $912,456.  In FY 2015-16 the TOT collections exceeded $1,825,000.  That is a 100% increase in revenues (demand) due to a 21% increase in hotel room capacity (supply).  The existing hotels in Davis were the beneficiaries of 58% of that increase and the Hyatt Place produced the remaining 42%.
    More specifically:  That is a 100% increase in revenues (demand) due to a 21% increase in hotel room capacity (supply). 

    What I am trying to get at, is that word “DUE TO”. That is a big correlation you’re taking on there and it’s my opinion that it’s totally off base. The increase in TOT can be correlated partially due to the increased supply of rooms but probably mainly due to recovering economic conditions.

    As you mention in your post, our City TOT revenues drop from an all-time high of $1,120,983 to $912,456 from 2007-2009. That in your post is due to the overall economic recession of our nation’s economy. However, you give no attention to the fact that there was also an economic recovery from 2010 onwards. Instead, you correlate the increase in TOT with just the opening of the Hyatt Place. IMO an off-base stance to take publicly, especially as a member of the FBC.  The fact of the matter is you can count the number of Cities in California on your hand, who didn’t see a similar increase in their TOT from 2010 to 2016. Can you conclude the entire states hotel market increased because the Hyatt Place UC Davis was built? Far-fetched if you ask me.

    It was my mistake to correlate the 2009-10 TOT numbers with the opening of the Hyatt Place. The Hyatt Place was opened in May 2010 and does not reflect the 09-10 numbers.

    As far as the HVS studies go, both reports are very detailed and extremely concise. You state neither of the reports indicates or refer to TOT received by the City, however, the 2011 HVS Study clearly refers to the taxes in figure 4-9. Also, TOT tax is not necessarily the best source of information in regards to demand studies, as once again, they do not indicate the overall health of the market (just because TOT is growing, does not necessarily mean the hotel market is suited for more supply). TOT growth indicates a good overall picture of the hotel market, however, data from STR and analysis done by a professional hotel consultants are necessary for hotel demand studies. Also, I do not see any problem with the annual supply numbers – the 2016 HVS study clearly indicated they did not include the Days Inn and Motel 6 room counts in their analysis (the reason the numbers are different from 2011). Lastly, what is the importance of the 2011 HVS study for the Hyatt Place Expansion in our debate on whether a 51% increase in room supply is needed in our market in 2016?

    Hotel rates are not very micro-economical. Hotel guests are worldwide travelers. The rate at which a traveler is willing to spend on a hotel room does not only come from demand for that room in that City – hotel rates stem from an overall national economic stand point as a base coupled with the local demand for that hotel room.  The point I’m trying to get across here is, growth in TOT does not represent the demand for hotel rooms in our City.

     

    At the end of the day here, I am not arguing the fact new hotel supply can be added to our marketplace and it could potentially benefit the entire city, community, and existing hotels. My concern is the amount of new supply the City should allow before it becomes harmful to existing hotels and the City itself. The HVS clearly indicates what the best route is for us in terms of hotel development: The Embassy Suites and possibly 1 upscale 120-unit extended-stay hotel. I have yet to see why that report is untrustworthy.

    1. Matt Williams

      Rashon, thank you for this response.  You and I met in person for two hours discussing your concerns and sharing data 10 hours ago.  I must have sounded a bit obtuse in that meeting since I didn’t mention your post, but until now, I hadn’t seen it.

      What you have said above is wholly consistent with your comments in our meeting this afternoon.  So let me start by saying that the way you have read the words “due to” as “only due to” in my December 9, 2016 at 11:40 comment is a meaning that I did not intend.  As we discussed this afternoon, replacing the words “due to” with the words “associated with” or “at the same time as” are more satisfactory to you, and from my perspective do not change my original meaning.  I have asked the Vanguard to edit my comment to replace the words “due to a 21% increase in hotel room capacity” with the words “associated with, and at the same as, a 21% increase in hotel room capacity”  That way any person who is reading my December 9, 2016 at 11:40 comment from this point forward will not be able to make the same inadvertent inference that it is “only due to” the increase in hotel bed supply. Please accept my apologies for putting you in the position to make that unfortunate inference.

      As we discussed this afternoon I have been very clear in my past comments on hotel demand in Davis that there are multiple factors creating that additional demand.  My  October 29, 2016 at 12:14 am comment illuminated five factors, one of which was the 21% increase in supply.  The text of that comment was as follows:

      Alan, here are the fundamentals that relate to the increase in hotel market demand in Davis.

      First is the 56% increase in UCD applications from 51,298 in 2009-2010 to 79,930 in 2015-2016.  More applications mean more applicant/parent visits to Davis each academic year. UCD statistics for 2010-2011 show that the 54,521 applications produced 47,600 visits by “prospective students and associated visitors” ( a rate of 87%). We do not know the exact number of hotel room stay-days from those prospective student visits, but if you assume one hotel stay day per applicant family (some will not visit the campus at all, some will stay one day, some two days and others will need two rooms) then the resultant 28,632 additional applicant visits means a 16% increase in the 2014 Davis hotel occupancy of 176,473 occupied rooms.

      Second is the 19% increase in UCD enrollment from 30,338 in 2009-2010 to 36,104 in 2015-2016, which mean many more (dare I say 19% more) parent visits to Davis each academic year.  We do not know the exact number of hotel room stay-days from those parent visits, but if you assume one hotel stay day per enrolled student per year (some will not visit the campus at all, some will stay one day, some two days and others will visit multiple times) then 5,766 additional enrolled students means a 3% increase in the 2014 Davis hotel occupancy of 176,473 occupied rooms.

      Third is the 7% increase in UC Davis Event Facilities that came with the opening of the UCD Conference Center in October 2009.  According to UC Davis documents the Conference Center hosted 158 events its first year with 26,792 total estimated attendance.  We do not know the exact number of hotel room stay-days from those additional events.  Numerically, 26,792 represents 15% the 2014 Davis hotel occupancy of 176,473 occupied rooms.

      Fourth is the fact that 2014 and 2015 occupancy saw a significant decrease in stay days from events historically hosted in Freeborn Hall, because that facility was closed for seismic retrofit renovations.  According to Lina Layiktez, UCD’s Director of Conference and Event Services a significant portion of the 75,000 person event attendance in Freeborn was for youth sports related events, which could not be accommodated at other UCD facilities, as a result those youth sports groups have held their events in cities other than Davis, with the intent of returning to Freeborn when the renovations are complete.  Lina’s experience with these yout sports groups is that a high proportion of them stay in local hotels during the events, which typically last from Friday through Sunday or Monday.  We do not know the exact number of hotel room stay-days from those youth sports events that have been absent from Davis since the summer of 2014.

      Fifth is the fact that prior to the construction of the highly visible Hyatt Place and Convention Center on the UCD campus, there was very low awareness within both the Commercial and the Meeting & Groups segments of the availability, quality and value of Davis hotels.  That poor image has been very largely supplanted with a quality image.

      With those objective factors illuminate, I would like to address (1) your concern about Davis’ increased demand being a bubble that will implode when the next economic downturn happens, as well as (2) your comparison of hotel stay days to Shilling Robotics products.  Regarding (1), the increases to UCD applications, to UCD enrollment, to the available inventory of UCD Event/Conference space, and to the increased visibility of Davis hotel options are all recession-proof realities.  Further, UCD is expecting additional incremental increases in both applications and enrollment.  Regarding (2) Schilling’s proprietary state-of-the-art devices are highly differentiated products.  On the other hand, hotel rooms are commodities pure and simple.  Hotels work hard to differentiate themselves from one another, but at the end of the day (pun intended) a hotel room becomes little more than a bed and a light switch providing a place to catch a person’s daily ration of 40 winks.

      Continuing that consistent theme my October 16, 2016 at 11:02 pm comment listed six changes in the hotel room supply demand over the period from 2009 through present.  The text of that comment is as follows.  (Note the percentages are different from the current percentages because the Fiscal 2015-16 TOT collections had not been reported by the City at the time the comment was published in October)

      Eileen, do you have any data to support your belief in the “one additional hotel now but not two” argument?

      The following objective, public record data illuminates actual changes in the hotel room supply demand over the period from 2009 through present.

      (1) The 2009 TOT revenues received by the City of Davis were $912,456

      (2) the UCD Conference Center on Old Davis Road opened in October 2009

      (3) The Hyatt Place on Old Davis Road opened in March 2010 with 75 rooms, which was expanded to a total of 127 beds in March 2014

      (4) The 127 beds of Hyatt Place represented a 25% increase in hotel beds in Davis from 379 beds to 506 beds

      (5) In the 5-year period after the Hyatt Place opened, the City’s TOT revenues increased over 57%, more than double the percentage beds increase.

      (6) When you add in the equivalent TOT revenues from the Hyatt Place the aggregate increase goes to over 80%.  That’s an 80% revenue volume increase from a 25% increase in beds.

      ———————————-

      Why did a 25% increase in supply produce an 80% increase in demand?

      I believe the first reason is the highly visible arrival of the Hyatt Place and Convention Center on the UCD campus.  It raised awareness within both the Commercial and the Meeting & Groups segments of the availability, quality and value of Davis hotels.

      I believe the second reason is the increase in UCD enrollment from 30,338 in 2009-2010 to 36,104 in 2015-2016, which mean many more parent visits to Davis each academic year.  If you assume one hotel stay day per enrolled student per year (some will not visit the campus at all, some will stay one day, some two days and others will visit multiple times) then 5,766 additional enrolled students means a 3% increase in the 2014 Davis hotel occupancy of 176,473 occupied rooms.

      I believe the third reason is the increase in UCD applications from 51,298 in 2009-2010 to 79,930 in 2015-2016, which mean many more parent visits to Davis each academic year.  If you assume one hotel stay day per applicant family (some will not visit the campus at all, some will stay one day, some two days and others will need two rooms) then 28,632 additional applicant visits means a 16% increase in the 2014 Davis hotel occupancy of 176,473 occupied rooms.

      I believe another (largely untapped) factor is the substantial amount of money UCD currently pays through its Accounts Payable Department for Faculty and Staff to go to out of town conferences and meetings (the Groups and Meetings segment) .  Hyatt Place and the new UCD Conference Center have created an environment where some of those conferences and meetings can and do take place here in Davis.

      Prior to those two thorough looks at demand drivers for hotel space in Davis, I addressed two of the drivers in a August 25, 2016 at 9:33 pm comment that read as follows:

      Odin said . . . “But couldn’t that be due to it’s proximity to campus?”

      It absolutely is due to its proximity to campus.  It also is due to its proximity to the new UCD Conference Center.  Prior to the opening of the conference center, the closest thing Davis has had to a conference center is Veterans Memorial.  The UCD Conference Center has considerably more capacity to host visitors than the Hyatt Place has capacity to house visitors.  Bottom-line, the supply of convention/meeting/group gathering space is significantly greater than the supply of beds to house the attendees of those conventions/meetings/groups that are gathering in the available space.

      Not only is the demand from the conventions/meetings/groups market segment greater, the demand from the parents/families of UCD students is greater.  The number of UCD students has risen 17% in the last four years.  That means approximately 17% more parent and family visits to Davis, and the Hyatt Place, so close to campus is the go-to choice for most of those (although lots of family visits are looking for much less expensive lodging than Hyatt Place provides).

      In addition you have an increase in applications, which rose 38% from 62,515 to 86,041 in the last four years.  What proportion of those additional 23,500 applicants made a visit to UCD as part of their college selection process?  How many of those 86,041 college applications resulted in a hotel stay in Davis including one or two rooms at the Hyatt Place?

      That comment was preceded by another demand comment at August 23, 2016 at 1:20 am that read as follows:

      Robert, thanks for taking the time to add your well reasoned thoughts to the dialogue.  As a Million Miler on both Delta Airlines and American Airlines, I have walked the same walk you have described, so I hear you loud and clear.

      My response to the issues/challenges you have raised is very similar to the one I made to Tia Will in today’s other thread, but with a slightly different focus.  In their Market Analysis presented to Council on March 15th, HVS produced the following Figure 5.5 that segmented the current hotel visitors into four (4) segments, Commercial, Leisure, Meeting & Group, and Extended Stay. with the 506 current beds being filled by the following proportions, Commercial 40%, Leisure 36%, Meeting & Group 21%, and Extended Stay 3%.

      You and I have made considerable contributions to the Commercial segment, and not surprisingly, HVS shows Hyatt Place with the highest proportion of Commercial occupancy in town (50%), as well as the highest occupancy rate (80-85%).  When Hyatt Place is full and gets a call for a room, it isn’t clear what the room recommendation decision tree is going to be, but regular visitors to Hyatt Place on UCD related business will no doubt be members of the Hyatt frequent stay club, and want to buid u their Hyatt points if possible, even if the Hyatt Place can’t give them a room.

      http://www.davisvanguard.org/wp-content/uploads/2016/08/2016-03-15-CC-Item-08-Hotel-Market-Analysis.jpg

      With that thought out of the way, lets take a look at the four market segments.  As I said to Tia, I worked very hard to be sure my article did not stray into the realm of opinion . . . and tried to stick to the facts, but with that said, here are my forward-looking thoughts about the Davis hotel market.

      My opinion is that there is a substantial (dare I say very substantial) pent up demand for hotel rooms in Davis.  I believe there are three reasons for the existence of this pent up demand.

      The first reason is the afore mentioned recent arrival of the Hyatt Place on the UCD campus.  It raised awareness within both the Commercial and the Meeting & Groups segments of the high quality and value of Davis hotels.  Its 127 bedrooms added 25% more capacity to the existing 379 hotel bedroom supply in Davis. Think the Coke and Pepsi Wars ads back in the mid 70’s.  Both companies “won” that battle because the overall awareness of the cola market grew at the expense of 7Up and Ginger Ale and others.

      The second reason is the substantial rise in UCD enrollment, and especially in applications to UCD, which mean many more high school student and parent visits to Davis (the Leisure segment).  The 2014 Occupied Beds number for Davis was 176,473. 10% of that is 17,647 stay days.  If you assume two (2) stay days/beds per visiting applicant family (some will stay one day, some two days and others will need two rooms) then 8,825 additional applicant visits means a 10% increase in occupancy.

      The third reason is the (dare I say massive) amount of money UCD is paying through its Accounts Payable Department for Faculty and Staff to go to out of town conferences and meetings (the Groups and Meetings segment) .  Hyatt Place and the new UCD Conference Center have created an environment where some of those conferences and meetings can take place here in Davis.

      Those three factors tell my Wharton brain that the Davis hotel marketplace is having its own 2010’s version of the 1970’s cola advertising battle.  Just as Coke and Pepsi both saw their volumes and revenues skyrocket, I believe the recent 5-year trend of steadily increasing occupancy and revenues will continue, and possibly even accelerate.

      JMHO

      That comment was preceded by an August 22, 2016  article I wrote for the Vanguard that read as follows:

      What Does the City’s Comprehensive Annual Financial Report Tell Us about the Health of the Hotel Market in Davis?

      In all of the Vanguard dialogue about the Hyatt House project, to date there has been very little discussion about the fiscal viability/sustainability of the project.  As a member of the Finance and Budget Commission, I received a copy of Dan Carson’s   August 14, 2016 Hyatt House Hotel Potential Fiscal Impact report.

      In his Summary of Findings, Dan states, “The Hyatt House project would financially benefit the city and local agencies. For example, it would likely result in a net fiscal benefit to the City of Davis of almost $700,000 annually.”
      Over 90% of that ongoing financial benefit comes in the form of $629,000 of Transient Occupancy Tax (TOT), and Dan’s report goes on to acknowledge that the TOT estimate is sensitive to occupancy and room rate assumptions.

      Dan’s report also addresses the question that the City Council has discussed over the past year, specifically the potential impact of additional hotel project projects, such as the Hyatt House, on the city’s existing stock of hotel properties.
      When the Planning Commission weighs the benefits and objections to this project on Wednesday night, I believe it is important to ensure that the fiscal benefits are truly additional for the community.  There is some concern that the TOT revenues the City will receive from this project will not be net additional revenues, but rather a redistribution of TOT revenues from the existing hotels.

      To examine that concern I analyzed Dan Carson’s statement, “City hotel tax revenues increased in recent years even in the wake of past hotel expansions by UC Davis outside of the city limits.”  The support Dan provides for that statement comes from the City’s Comprehensive Annual Financial Report (CAFR).

      The CAFR reports that the City’s TOT revenues in FY 2009-10 were $912,456 and rose 44% to $1,319,909 in FY 2014-15.  That strong performance happened at the same time as the Hyatt Place on the UCD campus added a total of 127 beds that are reported to have achieved 86% occupancy.

      If the City received TOT revenues from the Hyatt Place, that would raise the TOT revenue increase from 44% to 77%. Some of that 77% increase was due to improvements in the overall economy, as we emerged from the Great Recession, but I believe a more important factor was that the addition of the Hyatt Place tapped into unmet demand for hotel beds.  The addition of the 127 beds at Hyatt Place increased the hotel bed supply in Davis from 379 to 506 (not including either Motel 6 or Days Inn).  That represents a 33% increase, far short of the 77% increase in TOT.

      Bottom-line, the adding beds to the Davis market tapped into unmet demand associated with the UC Davis campus, and the result was that according to the analysis provided by existing hotel owners “the occupancy rate has increased from 61 percent in 2012 to 67 percent in 2014 (the most recent data available).”

      All of the above leads me to believe that the addition of Extended Stay beds to the Davis market will further tap into that unmet demand emanating from the UCD campus, especially since the HVS study provided to Council in March says that the current Davis hotels only derive 3% of their current revenues from the Extended Stay market segment.

      In summary, I believe the City’s Comprehensive Annual Financial Report (CAFR) information gives the Planning Commission an objective measure of the health of the current hotel market in Davis, and that Dan Carson’s estimate of $629,000 of additional annual TOT revenues for the City is very likely to be accurate.

      With all the above said, I once again apologize for putting you in the position to make the unfortunate “only due to” inference. That was a meaning that I did not intend.

  5. Ron

    Matt:  “Price (rates) is the result of the realities of the Supply/Demand curve.  The only way that rates can go up is if Supply goes down and/or Demand goes up.”

    Not a comment regarding hotels, in particular.  However, prices (for essentially everything) rise over time, as a result of inflation.  (Nothing to do with supply/demand.)  No doubt, this impacts the cost of running a hotel over a period of time, as well.

    In general, other factors can also increase costs (and prices).

    1. hpierce

      However, prices (for essentially everything) rise over time, as a result of inflation.  (Nothing to do with supply/demand.) 

      You’re talking theoretically, right?  In the 70’s definitely true… not so much in the last 5 years… for SS and PERS/STRS last year the inflation rate was considered to be ZERO… mortgage rates have been lower than they were since the ’50’s…

      Supply and demand, interest rates, and inflation are semi-conjoined triplets.   Difficult to separate.

      1. Ron

        hpierce:  I should have clarified that local supply/demand may not have been the “cause” of the increase, as Matt had stated.

        Mr. Patel’s response is better/more detailed, than mine.

        1. hpierce

          Acknowledged… and my best to you and yours…

          But, need to say, if Matt erred [which I do not assume] he did not do so as part of an “agenda”… he meant it honestly… as a very knowledgeable person

      2. RoshanPatel

        I think what Ron is trying to get at is the Consumer Price Index as risen over the past couple of years especially for the hotel market not necessarily the nation’s rate of inflation as a whole. The rate for which a consumer is willing to pay for the same hotel room in the past 6 years has risen greatly due to several factors (not just the demand for it in the local marketplace)

        Truth is, our latest rate hikes in Davis, CA has been mostly driven by our feeder markets astronomical rise in demand/rates in their cities. A feeder market in the hospitality world is the “gateway” city in which travelers stem from. In our local market, places such as San Francisco, Napa, San Jose, Monterey even Los Angeles and Seattle are considered “feeder” markets. The rates or demand in these markets has risen considerably. The traveler has become more “accustomed” to paying a higher rate at hotels there, therefore, markets such as Davis benefit from this.

        Another reason why hotel rates go up, in which has nothing to do with the local demand for a room include rising operating costs…for example, the minimum wage has risen 25% in California from 2008 to 2016 – the greatest operating cost in a hotel (labor) and what many line level employees earn in a hotel. Our expenses go up, our rates go up.

         

         

        1. Matt Williams

          Rashon is correct, the minimum wage in California has risen in recent years.  With that said, during the 2010 through 2014 period there was no change in the minimum wage.  2015 moved up from $8 to $9 and 2016 moved up from $9 to $10.  So the average annual minimum wage rate during the six year period from 2010 through 2015 was $8.50, which is 6% higher than the starting point.  Now compare that 6% increase to the 100% increase in TOT revenues during that same period.  In fact the going forward increase of 25% (from $8 to $10) is still small when compared to the 100% revenue increase.

          History of California Minimum Wage

          effective date ____ new minimum wage

          January 1, 2016 __ $10.00

          July 1, 2014 ______ $9.00

          January 1, 2008 .__ $8.00

          January 1, 2007 .__ $7.50

        2. Matt Williams

          Now let’s deal with Rashon’s comments of the feeder markets.  All he is describing is the Price Elasticity of Demand.  When consumers become “trained” regarding the price of a product/service in one market and then go to a different market where the price structure is lower than the price structure in their “home” market, their Price Elasticity of Demand in the different market is higher than it is in their “home” market.  Higher Price Elasticity of Demand in a market means more Actual Demand in that market.  More Actual Demand means more occupied rooms and the ability of the hoteliers to charge somewhat higher rates.  More occupied rooms and higher rates mean more hotel revenues, and during the 2010- 2016 period 10% of those higher revenues went to TOT.  The result was the aforementioned 100% rise in TOT revenues during that period.

          With that said, Price Elasticity of Demand is also affected by competition in the Supply market.  One individual Davis hotel can not raise its room rates to San Francisco levels and expect its occupancy to stay the same if the other hotels in town keep their rates at “Davis levels.”   As I told Rashon in our meeting Tuesday afternoon, when I was making a reservation for an April hotel night in Phoenix next spring I didn’t use Las Vegas “feeder market” prices as my rate shopping comparison, nor did I use the Lone Pine California rates my overnight stop three days earlier in the trip as comparisons.  Instead I used “geographic comparables” in the Phoenix market for my price comparison before settling on the Crowne Plaza as the best price/value offering.

           

    2. Matt Williams

      Ron said . . . “However, prices (for essentially everything) rise over time, as a result of inflation.  (Nothing to do with supply/demand.)  No doubt, this impacts the cost of running a hotel over a period of time, as well.”

      You make a very good point Ron, and during the period from 2010 through 2015 the Consumer Pice Index grew by the following percentages:

      2010 = 1.6%

      2011 = 3.2%

      2012 = 2.1%

      2013 = 1.5%

      2014 = 1.6%

      2015 = 0.1%

      The sum of those six annual increases is 9.1% (10.5% with annual compounding).  That is definitely a component of the 100% rise in TOT revenues, but how significant a component it is, is worth pondering.

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