Hotel growth spurt brings more franchises

Hotel growth spurt brings more franchises

(Dec. 26, 2014) When it rains, it pours.

After more than a decade of condo-heavy development and a relative dearth of hotel and motel growth, Ocean City is indicating the approach of another hotel boom.

But even more than before, the big money is on franchise establishments, which stand to change the landscape of the resort’s historic reliance on independent establishments for most of its lodging capacity.

“There is definitely some kind of shift that will happen,” said Susan Jones, executive director of the Ocean City Hotel-Motel-Restaurant Association.

“The last big hotel growth spurt was around 1997-1998. But I think we’re seeing a bigger influx of capital now than we were even then.”

In the past year, the resort has seen the opening of a new La Quinta on 33rd Street, replacing the Ocean Voyager motel and a Marriott is under construction at 61st Street at the site of the old OC Health and Racquet Club.

Plans have been approved for an expansion of the Quality Inn at the vacant oceanfront property on 34th Street, as well as for the Sea Scape Motel at 34th Street to be rebuilt into a Hyatt. The former Misty Harbor Motel lot at 35th Street is also approved for a Fairfield Inn.

Data from the Smith Travel Report, which indexes data from major chains and franchise groups, indicates that the resort is ready for them.

As of October, Ocean City’s year-to-date occupancy rate was up 4.1 percent over 2013, exceeding the gains seen in all of the resort’s competitor markets except Myrtle Beach and southern Delaware.

At the same time, however, Ocean City’s increase in average rate for 2014, is only 0.8 percent so far, the lowest of the competitor set.

Ocean City’s average daily rate, per Smith Travel, has been the highest by far for several years. The average cost per-night for 2014 is around $160, $30 more than the next highest region.

This disparity becomes even more severe if data is just taken over the summer months. Ocean City’s average rate in August for hotels reporting to Smith Travel was $221.93.  The next-highest area was Virginia Beach at $177.27.

This would indicate that Ocean City’s major chain hotels have hit the end of the rate-increase cycle seen over the past few years and are now looking toward occupancy headroom in order to keep growing.

Despite the decent occupancy growth in 2014, Ocean City’s revenue per available room (occupied or not) was somewhat underwhelming, at 5 percent, compared to other areas. Myrtle Beach and southern Delaware saw more than double the growth in raw revenue.

But given that there’s only so much room in Ocean City, franchise expansion must come at the expense of something else.

“The mom and pop places are really getting pushed out,” said Sal Fasano, whose family knocked down the dilapidated Ocean Voyager to build the La Quinta.

The new hotel is actually only one room larger than the Ocean Voyager. But space was not what drew the Fasanos to franchise.

“The franchises have a distinct advantage when it comes to purchasing power,” Fasano said. “They have a distinct advantage online. When you’re a little mom and pop place, you’re trying to advertise on your own, versus signing up with a corporate franchise that has tens of millions of dollars in web presence.”

As online reservations have become the norm, pre-booking of hotels has gone up considerably. Many owners find that franchise affiliation is a safety net.

“The chain gives security to the owner,” said Jeff Thaler of Atlantic Planning, Development and Design. “For the most part, the chains, because the clientele has access to the 800 number and the Internet, are pretty much pre-booked for the summer.”

Thaler’s firm is handling the 61st Street Marriott and 25th Street Fairfield projects, and previously built the 43rd Street Hampton Inn three years ago.

“I would estimate that the big chains are already 75 percent booked for the summer,” Thaler said. “Most people who come down there spontaneously find that the chains are already full or too expensive. That’s where the mom-and-pop market comes in.”

The demand for chain hotel business may also be the result of natural attrition and regrowth in the city’s demographic. Visitors unfamiliar with Ocean City are more likely to go with a well-known chain than take a chance on an older, independent establishment.

“You have to remember that we’re spending all this money in advertising to the northeast, in New York and Jersey, and out west into Ohio to get new people,’ Thaler said.

“Somebody that lives in Cincinnati doesn’t know to call the local motel for a good deal, but they can go online and find chain properties in a second. It’s about the consistency of the amenities. People coming on vacation want a consistent product that they’ve stayed at before.”

Even when the Ocean Voyager was torn down, it still had a historic customer base remaining, Fasano said. But the future was more promising with a franchise.

“We had a lot of loyal customers that still stayed there,” Fasano said. “But with a franchise, there are a lot of benefits.”

New franchise hotels will continue to siphon off some customers from older establishments. But they may also draw brand-loyal visitors who will choose their destination based on the availability of their favorite franchise.

“A lot of the clientele for these projects is going to come from the other properties in town,” Thaler said. “But by the same token, you have people who like Marriott and wont’ stay anywhere but Marriott. It makes for more of a draw. I think it’s a net positive.”

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