Room for growth
As Palo Alto's hotel market heats up, builders and city officials are looking to cash in
Developers and Palo Alto land-use watchdogs rarely speak with the same voice, but when the venerable Rickey's Hyatt hotel closed its doors in June 2005, just about everyone was singing the blues.
The hotel had opened during Palo Alto's post-World War II boom and evolved into a quaint but prominent community resource, with groups such as the Chamber of Commerce and the Rotary Club using its banquet hall as their meeting space. Its list of famous guests included President Bill Clinton, Willie Mays and Jesse Owens.
Its design, now thought of as charmingly old-fashioned, was visionary at the time. Ward Winslow, in his centennial history of Palo Alto, credited John Rickey with creating a new breed of motel when he opened Rickey's Studio Inn in 1952. Rickey "used lawns and shrubbery, pools and statues, even swans, to create a novel trend in 1952: the garden motel. Before long, it was being imitated wherever the climate permitted."
"It was really a wonderful community facility in many ways," said Councilwoman Karen Holman, who served on the Planning and Transportation Commission at the time of the hotel's closure. "Many city events and public events happened there. The Clintons stayed there."
Hyatt, which had bought Rickey's in 1962, proposed in the late 1990s to replace the hotel and add 300 homes. But after years of opposition from residents throughout the city, Hyatt in 2004 announced its plan to close the hotel and build only homes. Rickey's closed in June 2005.
The hotel's departure dealt a financial blow to the city, which was already seeing tax revenues plummet during the dot-com bust. The hotel was bringing in close to $1 million in annual hotel-tax revenues — money that went directly into the city's General Fund and helped pay for basic city services. The community outcry was loud. Developers and business leaders used the episode to rail against the "Palo Alto process" and blamed the city for chasing away a valuable asset. Land-use watchdogs, neighborhood groups and other critics who had castigated Hyatt's residential proposal lamented the loss of a valuable community asset and to this day demonize the development that came to occupy the site — a 185-townhouse community called Arbor Real.
But at least one good thing came out of the hotel's departure: It prompted Palo Alto's elected leaders to look for new ways to attract hotels and raise hotel-tax revenues. In 2006, the council changed the city's zoning code to provide incentives for new hotel development. The changes include creating an overlay district that allows hotels to be developed at double the density of what is normally allowed.
Today, these efforts appear to be bearing fruit. Two major hotel proposals — a Hilton Homewood Suites and a Hilton Garden Inn — are now making their way through the city's planning process. Another hotel proposal, at the site of Ming's restaurant near the Palo Alto Baylands, received the City Council's approval earlier this year, though the project could be delayed by financing difficulties, owner Vicky Ching has said.
Though these hotels may not materialize for several more years, the new applications are giving the City Council and staff reasons for optimism. At a recent meeting, Councilman Pat Burt called the hotel trend "one of the few economic elements that we were able to influence to a significant degree."
"On the heels of the Hyatt Rickey's closing, the sentiment of the council and the community was, 'Woe is us! We'll never get another hotel,'" Burt said in March. "We moved to both a marketing program and zoning changes to address that."
The renewed interest in hotels is arriving just as rooms at existing hotels are seeing their fortunes turn for the better. Like other sectors of the economy, hotels suffered a heavy economic blow during and after the Great Recession. According to PKF Consulting, an analyst of hotel trends, hotel managers nationwide budgeted for a 6.8 percent increase in their revenues in 2008, only to see revenues decline by 1.8 percent as the economy tanked. Things got worse in 2009, a year in which the industry suffered through "record-breaking declines in revenues and profits," according to PKF. In the Peninsula and South Bay area, the vacancy rate dropped from an already underwhelming 68.6 percent to 63.7 percent between 2008 and 2009, and the average daily room rate declined from $139 to $117.
"After 9/11 there was a big recession. Then things were on fire in 2007. Then in 2008, when the financial crisis hit, things went back down into the dumps," recalled Clement Chen, whose company, Pacific Hotel Management, owns the Westin and Sheraton hotels on El Camino Real near downtown Palo Alto. "I'd say 2009 was probably the low point for all kinds of businesses and for the hotel business in general."
But the outlook has improved. Chastened by recent experiences, hotel managers across the country budgeted for "a paltry 1.2 percent increase in revenue" for 2010, according to PKF. That year, however, rooms filled up faster than expected, and revenues climbed by 5 percent. Managers expected occupancy rates to increase by 0.7 percent in 2010. They ended up going up by 5.8 percent.
Palo Alto, where the hotel market is historically strong, is cashing in on the improving climate. After seeing its hotel-tax revenues plummet by 10.8 percent between 2008 and 2009, the city is facing a rebound. In August of this year, the average occupancy rate at local hotels was a robust 84 percent, up from 71 percent in August 2010. Daily rates had climbed from $139 to $159. A recent report from the city's Administrative Services Department acknowledges that the revenue source is economically sensitive but concludes that the city's projection of bringing in $8.2 million in transient-occupancy tax this year "will be realized and possibly exceeded."
"The strong results are primarily due to a strong local business environment," the report stated.
The fresh numbers, along with the crop of new hotel proposals, are giving city leaders a reason to smile. During last month's council discussion of the city's economic development, Burt attributed the resurgence of hotel projects to the council's aggressive effort over the past five years. In 2006 and 2007, the council changed the zoning code to ease density restrictions for new hotels in commercial zones. The city had also partnered with the San Mateo County Business Bureau to promote local hotels through a program called "Destination Palo Alto" <02014> which the city subsidized with $240,000 a year before privatizing it in February 2010.
"We had a clear recognition of the way in which this city has many inherent attractions for hotel stays," Burt said at a Nov. 29 meeting of the council's Policy and Services Committee. "We didn't have a lot of hotels.
"There was a great lament when Hyatt Rickey's closed that we'd never get another hotel," he added. "Now we have, what, four in the works? We did it through zoning, and we did it through marketing."
If built, the proposed hotels would add close to 500 rooms to the city's hotel scene. Perhaps most importantly, officials say, these rooms would cater to the type of clientele that currently has a hard time finding accommodations in Palo Alto — business executives, families of Stanford University students and the various dignitaries who routinely visit the university. The city now has about 25 hotels, but many of them are older and charge comparatively less — not the type a group of executives visiting Hewlett-Packard or VMware would likely patronize.
"We have many smaller, older hotels on El Camino Real, but they don't serve the type of demographic of folks who want to come in here for business purposes or to Stanford," Curtis Williams, the city's planning director, told the Weekly.
Palo Alto Economic Development Manager Thomas Fehrenbach said he often hears from local high-tech companies about the shortage of hotel space for their visitors.
"What's interesting about Palo Alto right now, in terms of the economy, is that we seem to be white-hot," Fehrenbach told the Weekly. "The demand for hotel rooms here I'd say is multi-faceted. We've got companies in the research park; we have the hospital going through the expansion; we have Stanford University with all of its events and with all the alumni and parents visiting.
"In conversations with companies, large and small, one of the comments I often get is, 'We'd love to be staying in Palo Alto but we couldn't find any availability, so we're staying somewhere else.'"
A report the city commissioned in 2008 supports the anecdotal evidence. The study by Economic Resource Associates was prompted by a proposal by Stanford University to build a 120-room hotel at Stanford Shopping Center — a project that Stanford had paired with the massive expansion of its hospital facilities.
According to the report, Palo Alto had about 1,865 units in 2008, 300 more than Mountain View and about 650 more than Redwood City. But the firm also found that Palo Alto's hotel scene has plenty of room to grow and that an upscale hotel at Stanford Shopping Center would be economically viable. Economic Resource Associates cited the property's proximity to "major demand generators in the Silicon Valley and at Stanford University"; convenient access to Stanford Shopping Center, the university and downtown Palo Alto; and a location between two major international airports. The firm predicted that a 3.5-star hotel with 275 rooms would achieve an occupancy rate of 75 percent with an average daily rate of $225. Most importantly, from the city's perspective, it would bring in about $2 million in annual revenues.
Though Stanford's hotel proposal is no longer on the table (Stanford dropped the idea so that it could focus on the hospital expansion), the idea of having a hotel in the mall remains on the city's wish list. It is included — along with an auto mall, expanded parking lots and a digital billboard — on a list of revenue-boosting ventures city staff is keeping an eye on.
Williams said that even though the planned hotel at Stanford Shopping Center never materialized, the process could have influenced subsequent applications.
"(Stanford) didn't do it, but it may be that the process at least brought the subject up to a point where others realized that the city is interested in it," Williams said.
For all the optimism, the past decade has been a barren time for hotel development in Palo Alto. When the 42-room Hotel Keen opened on High Street last year, it became the city's first new hotel in a decade. Meanwhile, the 2000s have seen two hotels depart — Rickey's and the Mayflower Garden Hotel, which closed in October 2007.
That trend, however, also appears to be headed down a new path.
The city's Architectural Review Board got its first look this week at a proposed Hilton Garden Inn — a four-story, 176-room hotel that would stand near the busy corner of El Camino Real and Arastradero Road. According to a staff report, the U-shaped hotel would include "amenities such as on-site bar and restaurant, high-speed Internet, a well-equipped business center, an indoor pool and Jacuzzi, and an outdoor fire pit." The ground floor would also include exercise room, a lounge and offices.
The upscale hotel would, in short, serve the type of clientele that currently has to look outside the city for rooms — business travelers, venture capitalists and Stanford alumni. The letter from the project architect, Architectural Dimensions, describes the Hilton Garden Inn as "a nationally recognized upscale lodging chain with a loyal following among business and leisure travelers."
Just south of the Garden Inn, at the site of the former Palo Alto Bowl on El Camino, a four-story tall, 167-room Hilton Homewood Suites is planned. The application for the extended-stay facility was approved by a somewhat divided council in December 2009.
Another new establishment that could potentially boost the city's coffers by up to $670,000 a year is a 140-room hotel near the Baylands, at the site of Ming's. In April 2010, the council unanimously and enthusiastically approved the proposed hotel at 1700 Embarcadero Road.
"This, frankly, is exactly the kind of thing that we need to encourage," then-Vice Mayor Sid Espinosa said just before the vote. "It's not only a great project, but it helps to generate revenue for our city."
But the Ming's project also highlights the ongoing uncertainties in the hotel industry and, more generally, in today's economy. Ching told the Weekly that the hotel project is being "suspended" because of uncertainty over financing. The hotel will not be going up in the "very near future," she said.
"The economy has changed so much since we first started the process," Ching said. "It's not easy for us now to get investors. The world is in such an uncertain place — nobody knows what's going to happen."
The hotel could still get built sometime down the line, but there will be no construction for at least two or three years, Ching said.
She remains optimistic about the hotel's viability at the Ming's location, next to U.S. Highway 101. The city's approval, she said, will allow development of the hotel if the economy improves.
"We are glad that we did get the rezoning," Ching said. "Whenever we want to build a hotel, we can build a hotel."
The city's famously difficult approval process presents another obstacle for potential hotel builders. Clement Chen, who earlier this year planned to build a five-story "concierge wing" across the street from the Westin and the Sheraton, had second thoughts after the first public hearing on the project. He decided to withdraw the application.
With its 44 rooms, the boutique hotel would have brought the city about $500,000 in annual hotel taxes. But the proposal would have required the rezoning of the site to "planned community" — a designation that allows developers to exceed density requirements and other regulations in exchange for negotiated "public benefits" (negotiations over these vaguely defined "public benefits" often take many months). At a May hearing, the city's Planning and Transportation Commission decided that Chen isn't offering enough benefits and asked him to revise his proposal. He had offered new crosswalks, sidewalk improvements and way-finding signs. Chen told the Weekly he felt he couldn't provide any more benefits and still keep the project economically viable.
"It's a difficult project, and I worked for a period of time after that period trying to figure out what I could do to develop a package that would be acceptable to the planning commission," Chen said. "I thought the economics of the project wouldn't support any more."
Then there's the question of public opposition. Not all hotels in Palo Alto are created equal, and few could aspire to match the type of goodwill that Rickey's engendered. After the council's approval of the Hilton Homewood Suites hotel and 26 adjacent townhomes, legions of bowlers and residents lamented the demise of another "community treasure" — the Palo Alto Bowl.
Even as the council signed off on the project, two departing council members, Jack Morton and Yoriko Kishimoto (both of whom were participating in their final City Council meeting), criticized the plan and refused to vote for it. After hearing from dozens of disappointed bowlers, Morton called the bowling alley's departure a "big loss to the community" and characterized the design of the new hotel as too massive and dense.
"It's my last night on council," Morton proclaimed at the Dec. 14, 2009, meeting. "I ain't going to vote for another damn wall on El Camino."
Even supporters hedged their enthusiasm for the new hotel, citing its blocky design and mourning the departure of the Midpeninsula's last bowling alley. Councilmembers Yiaway Yeh, who celebrated his 30th birthday at Palo Alto Bowl, Larry Klein and Burt all noted that the land is private and that the proposed hotel conformed to existing zoning, leaving the city with few options.
"It's a community treasure, but it's something the city has no direct control over," Yeh said — hardly a ringing endorsement for a facility that would bring $850,000 in annual hotel-tax revenues to the city.
Potential traffic snarls have also blunted the community's enthusiasm for the new hotels. The Hilton Garden Inn would be located near an intersection that is currently the subject of the controversial Charleston/Arastradero traffic-calming, lane-reduction experiment. A prominent school corridor, Arastradero already sees heavy traffic backups, particularly during the morning rush hour.
But Williams said that hotels, for the most part, have a much smaller impact on traffic than other types of developments. This is particularly true during peak commuting hours, he said. Many hotel guests arrive later in the morning and depart during off-peak hours. And while some guests drive, many rely on taxicabs and public transit to get around.
"You don't have the same basic traffic issues that you may have with another type of use," Williams said.
Still, these impacts aren't necessarily negligible. In 2008, the city rejected a proposal for a five-story luxury hotel on Page Mill Road, close to El Camino. Neighborhood residents blasted the proposed high-rise and claimed its traffic and noise impacts would lower their property values. The application fizzled.
"That was a place where those impacts were critical," Williams recalled. "Having all that massing right next to single-family homes — the impact on traffic and access was seen as real treacherous."
While Palo Alto's future hotels still have plenty of obstacles to overcome, its existing ones are enjoying a period of relative prosperity. Chen, whose family has been running Palo Alto hotels since 1973, noted that Palo Alto's hotel market continues to outperform those of other Peninsula cities.
The last two years, Chen said, have been a period of "steady growth" for his two hotels. Visitors have been flocking to Stanford University in great numbers, spurred in part by the phenomenal success of Cardinal quarterback Andrew Luck. Though the senior is set to depart at the end of the year ("We'll be sorry to see Andrew Luck move on," Chen said), he sees no reason for major concerns. Silicon Valley is strong and getting stronger, and the university seems to be doing just fine, he said.
Chen expects his hotels to continue their relative prosperity largely because of their proximity to both the university and University Avenue. The bigger wildcard, from his perspective, is the regional economy, and that seems to be doing well — at least for the moment. Even if the new hotels are built, Chen said he expects the local market to accommodate them.
"The addition of those hotels alone isn't going to set the hotel business into any sort of crisis," Chen said. "We're really more affected by the economic health of the region."
Even if new hotels don't materialize, recent trends in the city's business climate suggest that the demand for lodging will not go away any time soon. Stanford University Medical Center and the cloud-computing giant VMware are both undergoing dramatic expansions, and HP continues to be a high-tech powerhouse and popular destination for executives. The recent arrival of influential companies such as Tesla and Skype to Palo Alto further suggests that guest rooms will remain a hot commodity in Palo Alto. For the moment, at least, city leaders have no reason to suspect that the slate of hotel applications in the city's pipeline will create a "bubble" effect.
"You can't flood the market, but it appears that the market has some ability to be grown," Burt said at a March meeting.
Holman said it's tough to predict how many new hotels will be too much, though it's safe to say the city hasn't reached that point yet. Holman recalled the period in the late 1990s when Chelsea Clinton was a student at Stanford University, and her parents, the former president and first lady, couldn't find a place to stay in town
"We weren't able to house in Palo Alto hotels the number of people who wanted to stay here, so it was lost revenue," Holman said. "Also, you don't want businesses to not locate here because they can't house people who come here for events.
"You want businesses who employ people here and who also bring guests here. You want to complete that circle."
TALK ABOUT IT
What has been your experience with finding hotel lodging in Palo Alto for out-of-town guests? Share your opinion on new hotel development on Town Square, the community discussion forum on Palo Alto Online.
Staff Writer Gennady Sheyner can be emailed at email@example.com.