(Editor’s Note: The following is the last of a three-part series on the hotel boom being experienced in the resort area with the spotlight this week on what it means for the local industry over the long term.)
OCEAN CITY – Almost 500 new hotel rooms will be available in Ocean City and along the Route 50 corridor by 2017, and if you figure several other hotel projects that are in the early planning stages, the net gain of rooms in the region could exceed 800 by 2020.
Yet, while new development and redevelopment is obvious and ongoing, the impact of this current hotel boom is still very much up for debate.
“In simplest terms, I think it will raise the prices during the summer, and bring the room rates down in the offseason,” said Jon Tremellen, General Manager of the Princess Royale Resort in Ocean City.
But Tremellen believes this current hotel boom is actually in the latter stages and like all trends, will end sooner than later.
“What goes up must come down,” he said. “I think we are probably in the seventh or eighth inning of this current boom, so my feeling is that if a new hotel gets open in the next year or two, they will be okay. After that, they may have a hard time.”
No Corporate Takeover
The influx of flag or brand hotels into the region have raised more than a few eyebrows amongst the so-called town purists who believe that the “mom and pop” hotel businesses could not only lose market share because of all these big name hotels, but could also just disappear altogether.
“That’s the multi-million dollar question,” said Ocean City Hotel-Motel-Restaurant Association Executive Director Susan Jones. “How can we make sure that the independent hotels, which helped build this town, survive? This new generation wants the brands because of the Internet. They want to know what they are getting before they get in the car. They want predictability and easy accessibility.”
Michael James, Managing Partner of the Carousel Hotel Group, stresses that even though big-name hotels are coming to town, there is no corporate takeover happening in the resort.
“These are franchises,” said James, “meaning local families are operating these hotels under the umbrella of the corporate flag hotels. They are paying for the name, and they have fees associated with that.”
Tremellen says those fees can be substantial and coupled with the seasonal nature of the economy, may create a slippery slope for operators.
“Seven to nine percent of your annual gross profits go right to the flag for the franchising fee right away,” said Tremellen, “then you have other costs like your management company fee, your travel agency costs, and other things too. In some cases, it can get close to 20% of your costs just to have the flag on your hotel.”
But Tremellen and James say there is another reason that more and more flag hotels are being built, and that has to do with banks.
“Since the recession, some banks wouldn’t give hoteliers a loan unless there was a flag attached to the deal,” said Tremellen. “They wanted the brand name attached to the deal because that brand provided some immediate credibility to the project. They want another set of eyes on it.”
In other cases, banks would require older hotels looking to redevelop to have a reputable developer, a management company and a franchise agreement in place before getting the loan.
James says people should be less concerned with the presence of flag hotels and should rather, pay more attention to the number of available rooms.
“If a hotel can’t maintain their product or keep up with the technology, they are going to have a hard time surviving whether they are a flag hotel or an independent,” said James. “Newer hotels may come out of the gates really strong in the first few years, but may plateau in year three or four. I think the established properties in town have a holding power in Ocean City because we are a resort community.”
However, one indirect consequence of this hotel boom is that older and smaller properties may throw in the towel because they can’t compete with the flag hotels.
“I think we may see some older hotel and motel operators cashing out and retiring from the business, and I think there are others who may not make it, unfortunately,” said Jones.
Customers Want Rewards
In order to compete with the popular “rewards” programs offered by many flag hotels, Jones says the OCHMRA is working with a handful of independent hoteliers to develop rewards programs of their own.
“This new generation has made the hotel business more risky and high stakes than ever before,” she said. “People want to use their reward points and local hotels, like the Francis Scott Key Family Resort in West Ocean City, are developing programs so they can offer their customers that added value and that incentive to keep coming back.”
Another popular theory is that the presence of flag hotels could drive down rates in the offseason, making the region attractive for people who want to cash in their reward points, and thusly, could extend the shoulder seasons for local businesses.
“That may happen a bit, but I think some of these flag hotels are going to be a bit alarmed by how long the offseason can be here,” said James. “High occupancies in the offseason just don’t happen here, and with a lot more hotels open year-round because they have to be, there will be a lot of competition for all of those rooms.”
This could accentuate a trend that many hotels in the resort are feeling on their proverbial profit sheets.
Many chain and independents have had stellar and even record summer seasons in terms of occupancy, ADR (Average Daily Rate), and REV/PAR (Revenue Per Available Room) in Ocean City in the past five years. But while that is a good thing for hoteliers, and mirrors the national trend, the catch 22 is that the offseason months have become so slow, that in some cases, hotels that are having banner summers are ending up with a decrease in their annual profits overall.
“We have people who have been coming for 20 years to the Carousel, and they have stayed loyal to our brand even though we don’t have a flag.”
‘It’s Still All About Location…’
So the question becomes are consumers more loyal to a brand or have they become completely loyal to value?
“I think it could be both,” said Jones. “They definitely want to use their points, and those added value points have made them fully committed to one particular brand.”
Tremellen says even when the hotel boom inevitably ends it probably won’t look like the end of the condominium boom.
“Ocean City is an anomaly,” he said. “If you look nationwide, the luxury resorts and the corporate hotels took the longest to bounce back after the recession, but Ocean City held pretty steady throughout. We may have gotten knocked down, but we never got knocked out. So, while everyone may be afraid of these changes, you have to make innovative changes to your business every few years or you are going to lose more than your market share.”
But while the number of new rooms flooding our region may be concerning to some hotels, James stresses that many owners simply need to look out their windows for a bit of serenity.
“It’s still all about location, location, location in a vacation resort,” he said. “If you have a good management team, you can keep up with technology, and you have a good location. I think independents are going to be just fine.”