Publication Date: Wednesday, April 13, 2005
Friend or foe?
Friend or foe?
(April 13, 2005) When two new luxury hotels debut on Palo Alto's borders, local hoteliers could feel the heat -- or reap the benefits
by Jocelyn Dong
Palo Alto has long enjoyed a reputation as a Mecca for things superior, from chi-chi restaurants to a highly touted brain trust.
But in the near future, there will be two pieces of prestige it won't be able to claim: the newest, poshest luxury hotels.
Those bragging rights will belong to East Palo Alto, which is expecting the Four Seasons Hotel to open this fall along U.S. Highway 101, and Menlo Park, which learned recently that the newest Rosewood Hotel will locate on Stanford land, along Sand Hill Road.
Although some perceive these latest developments as a snub on the city's well-heeled image, there is no dispute that Palo Alto's corporate headquarters, venture capital firms and close ties with Stanford University -- not to mention famed downtown business district and exclusive Stanford Shopping Center -- were part of the attraction for the posh hotels.
But the advent of the new accommodations on the borders of Palo Alto raises some questions for a city and a hospitality industry just dusting themselves off after the slump brought on by 9-11, the economic downturn and the tech wreck.
Will existing hotels, especially those currently considered the cream of the crop, feel the heat of competition -- or enjoy an overflow of cachet that the top-tier of luxury hotels could bring to the area?
One thing that is certain: The Four Seasons and Rosewood will not contribute hotel taxes to Palo Alto's revenue stream, which -- facing a $5.2 million budget shortfall -- could use all the help it can get.
Hotel taxes are a lucrative source of revenue for cities: Palo Alto's transit-occupancy rate is 10 percent of the room bill, the same as Menlo Park's and two points less than East Palo Alto's.
The Four Seasons is expected to bring about $3 million to $4 million into East Palo Alto coffers each year to pay for much needed city services. The deal was deemed so lucrative, desperate East Palo Alto officials agreed to let the Four Seasons keep the hotel tax for its first 42-months in business -- or until it collects $8.4 million.
Palo Alto gets about 5 percent of its revenue from hotels-- $5.5 million in 2003-2004.
The worry over hotel revenues is a very real concern. During the boom years, the city was drawing nearly $10 million in hotel taxes, which has plummeted 42 percent since that time.
With the expected closure of Hyatt Rickey's -- taking another $1 million in taxes with it -- some wonder if Palo Alto's bottom line will be able to stand the assault of the latest symbols of opulence.
"I can see it going either way," said Susan Arpan, the city's manager of economic development and redevelopment. It depends on what guests are seeking in lodging -- $375-a-night rooms at a name-brand hotel with a rooftop pool and spa along the highway, or a "boutique" experience in the heart of downtown Palo Alto.
"We're watching what's happening," Arpan said.
Palo Alto plays host to about 30 hotels and motels, from cheap residential types to top-flight accommodations charging $200 a night, with special rooms going for as much as $725 a night.
Hotel experts debate the impact the new properties and their 320 new rooms will have on existing hotels.
Some believe -- perhaps a tad optimistically -- the new hotels will not steal guests from local establishments, but rather those in San Francisco and San Jose. Those guests are staying in the larger cities expressly because they're seeking the type of luxury not available in the south bay, they reason.
But others rebuff that notion.
Business travelers account for about 80 percent of local hotel traffic, and for them, "convenience is the No. 1 deciding factor," said Thomas Callahan, CEO of PKF Consulting, a management firm in San Francisco for the hospitality, real estate and tourism industries. "No one's going to drive up from San Jose."
He believes the hotels will fill a need for a higher-quality facility than currently exists in the area, particularly given the investment banking and high-tech management that's here.
"People who can afford a $300-a-night room are having to stay at less quality hotels," Callahan said.
Due to the planned hotels' locations on Highways 101 and 280, Arpan thinks hotels on the Peninsula may lose some of their clients, rather than those located "west and east" of the area.
Even hotel chiefs acknowledge that new properties could affect their business. It's a common expectation that guests will shift among the hotels.
"I'm not highly concerned about the Four Seasons opening up, but it will have some effect," said Jonathan Farrington, general manager of the 163-room Stanford Park Hotel.
To think no one will shift hotels also seems a little unrealistic to Barbara Gross, general manager of the independent, 62-room Garden Court Hotel just off of University Avenue.
"I'm sure people will try it. Our expectation is that some people will make the move and others will choose to spend their time in Palo Alto in a more boutique environment in a downtown location," she said.
Ironically, she noted, out-of-town employees affiliated with the Four Seasons have been staying at the Garden Court.
Both the Stanford Park and Garden Court hotels -- and the Westin and Sheraton among others in Palo Alto -- consider themselves luxury facilities, offering a range of amenities and charging from the mid-$100s to nearly $300 a night.
Perhaps those who could best predict the future are the employees of businesses that send guests the hotels' way. They expressed mixed opinions, citing their need to pamper some executives or clients, while also having to watch the bottom line.
Elaine Cobb, a travel consultant with Lawyers' Travel Service, enthused about the new options.
"We're looking forward to the Four Seasons opening, because they are a name brand and something we are looking for," Cobb said. "We would definitely be interested."
Typically, the travel service will put an associate up in a $200-a-night room, but for VIPs the companies will pay up to $400 a night. The demand is there from attorneys, she said.
"The better they get at (their work), the more they demand. In particular, they get very busy and need more amenities," Cobb said.
But not everyone who makes million-dollar deals is looking for high-flying accommodations, according to the staff at venture capital firms. Even companies along the monied Sand Hill Road corridor -- home to venture capital and across the street from the proposed Rosewood -- might seek accommodations of only about $250 a night, said Lisa Repetto, an executive assistant with the VC firm, InterWest Partners.
"A lot of our people are start-ups, so I think that ($400 a night) would be a little bit out of their price range. They're in the market to raise money," she said.
The firm's advisory committee members might seek better accommodations, but have been satisfied with the Stanford Park and Garden Court, she said.
At high-tech Agilent, an executive administrative assistant said they look for hotels that accept the company's corporate rates. And because business travelers come from other countries and don't have drivers' licenses, the company works only with hotels that provide shuttle services.
Though no two communities are exactly alike, Palo Alto might look to Scottsdale, Ariz., for a clue to the future. Based on that city's experience, the new hotels might be a boon instead of a drain on current establishments.
In fall 2002, two luxury resorts opened just outside Scottsdale, bringing some 2,200 new rooms -- but none of the hotel tax -- to the city.
"It was a time of major concern for us," said Brent DeRaad, vice president of marketing for the Scottsdale Convention and Visitors Bureau. "There was a lot of angst over (room) rates."
But to their relief, what came to pass was not the death of existing hotels, but a temporary drop in hotel rates and occupancy, followed by rebounds in both.
"We thought it would drop 10 points, 20 points -- dramatically -- coming off of 9-11, but it just didn't happen," DeRaad said. Today, rates and occupancies are fully recovered, and the peak tourism season, which usually ends in April, appears to be extending to May this year.
Although Scottsdale capitalized on group resort travelers -- an unlikely scenario for business-focused Silicon Valley -- another phenomenon may occur: the trickle-down effect.
When the upper-end properties move in with their higher rates, the mid-tier hotels sometimes adjust their prices accordingly. "It leads to higher rates," DeRaad said.
Alternately, existing hotels could reposition themselves as the more economical luxury option, said Paul Casey of the city of Santa Barbara, which welcomed a new boutique hotel late last year.
In spite of whatever shuffling of guests may occur, local hotel heads insist they are looking forward to the arrival of their fellow hoteliers.
"I think it's great to have the marquee value of a Four Seasons hotel at the gateway to Palo Alto, to create a focus which is high profile," Gross said. "It's a terrific property and it will be beautiful and well-run. ... It will be great for the Four Seasons to raise the bar."
Arpan said that brand names actually bring business into town. Anecdotal evidence shows that traffic for local coffee shops has increased where Starbucks stores have opened.
Not only that, but new hotel business will bring shoppers and diners to downtown Palo Alto, boosting sales tax revenues.
It's a double-edged sword, though, Arpan said. While East Palo Alto and Menlo Park will reap the hotel taxes, Palo Alto will foot the bill for increased traffic and maintenance on roads.
One thing that will help is the overall market position of the hotel sector these days; it's picking up. According to Callahan, hotel revenues and profits are recovering from the tumult of the last few years.
The San Jose and Peninsula area saw a 5.1 percent increase in room rates in January 2005 over January 2004. Occupancy rates went up 4.2 percent in the same comparison, according to a PKF report. By most accounts, Palo Alto is doing better than the rest.
The city's hit higher hotel-tax numbers than the year before, every month from August 2004 through January 2005, the latest figures available. It's enough consistency to start using the word "recovery" with some confidence.
Though Palo Alto lost out on the Four Seasons and the Rosewood, could there be a hotel of that caliber in the city's future? Possibly, said Arpan, but it would be challenging.
There aren't a lot of available sites, she said. Underutilized "motel rows" on El Camino Real could be redeveloped, but their proximity to residential areas makes high rises problematic.
It will take a few years to see the impact of the newest feathers in the area's cap. The two hotels will open, other hotels may try new marketing strategies, and guests will decide what accommodations suit their preference -- and pocketbooks.
Meanwhile, hoteliers like Gross pledge to pilot their own ships with the same service and attention to guests' needs as always. What will happen will happen.
"No one has the answer. It's a wait-and-see," she said.
Editorial Intern Daniel Grujic contributed to this report. Senior Staff Writer Jocelyn Dong can be reached at jdong@paweekly.com.
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