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Disney’s Scrapping of Luxury Hotel Disrupts Development in Anaheim, California

CoStar
10/17/18

Disney’s Scrapping of Luxury Hotel Disrupts Development in Anaheim, California
Disneyland’s Hometown Seeks New Source of High-End Rooms
By Lou Hirsh

http://www.costar.com/News/Article/Disneys-Scrapping-of-Luxury-Hotel-Disrupts-Development-in-Anaheim-California/205485

 

The Walt Disney Co.’s recent decision to call off its plans for a luxury 700-room resort hotel next to Disneyland leaves Anaheim, California, behind other destination cities in high-end luxury hotels as a major retail development has been thrown into flux.

The city, which has two high-end hotels and three more approved or under construction, has tried to boost luxury hotel development with tax rebates. But a ballot measure next month that could increase the minimum wage for workers in hotels that take the tax break highlights how contentious the issue has become within this Orange County community in the Los Angeles suburbs. Adding to the pressure is Disneyland’s planned Star Wars Galaxy’s Edge attraction that is expected to result in a surge of visitors when it opens next year.

“The city has argued that they are losing out to some of the nearby cities as they have not been able to offer four- or five-star hotels,” Alan Reay, president of Irvine, California-based brokerage and research firm Atlas Hospitality Group, said of Anaheim.

The section of a popular Downtown Disney retail development near Disneyland, which had been targeted by Disney for the hotel, is caught short by the changing plans. It is expected to be returned to other commercial uses, though city officials said they have not been told of Disney’s exact plans. Disney had already closed a space that housed an AMC movie theater and some nearby restaurants at Downtown Disney to make way for the hotel.

The future of high-end hotels in Anaheim is further clouded by a living wage measure appearing on the November ballot in Anaheim. Measure L would require hospitality businesses receiving city subsidies to raise hourly minimum wages to $15 starting in 2019, gradually increasing to $18 by 2022.

Disneyland, which charges about $100 for admission, already is by far Anaheim’s biggest tourist generator — more than 25 million visitors came to the city last year — and hotel taxes account for almost half the city’s $330 million general fund budget, according to city figures.

Luxury hotels are considered crucial to the economies of destination cities because they attract visitors who generally stay longer and spend more on steep nightly room rates, events and goods in the community than other consumers, Reay said. Anaheim’s small luxury hotel market is dwarfed by Los Angeles, San Francisco and San Diego, which all have at least 13 hotels that are rated at least Four Diamond luxury level by the American Automobile Association.

Michael Lyster, spokesman for the city of Anaheim, said the city still desires high-end hotels, but because the area adjacent to Disneyland is essentially built out, those future hotels will probably need to be built by other private developers, possibly those willing to buy up existing older properties elsewhere in the city to redevelop them as high-end hospitality.

“In the long run, we’re going to need hotels of all types and all stripes to meet the visitor demand,” Lyster said.

Hotel operator and consultant Robert Rauch, whose company does business throughout Southern California and Arizona, said Anaheim’s room rates have begun to approach those in markets such as San Diego, but the home of Disneyland is still generally not considered a high-end hotel market by the hotel industry.

“That said, there is a niche of travelers who prefer luxury accommodations and clearly Disney felt they could attract them,” said Rauch, chief executive of San Diego-based RAR Hospitality. “Hence, yes, there is an opportunity for one or two super luxury hotels if they are smaller boutique hotels and can be built for less than $300,000 per room.”

Even so, Rauch said, those properties “can never compete with waterfront properties that charge $400-$700 per night, in my opinion.” He adds that Anaheim’s quest for more luxury hotels could be tripped up if the currently strong travel and tourism economy slows as interest rates and construction costs may climb.

“The overall economy is favorable for luxury hotels, but if there is a correction that will be the sector impacted the most,” Rauch said.

Disney’s luxury hotel was envisioned as joining two other high-end hotels that are now under construction next to Disneyland and are expected to open within the next 18 months — a 466-room JW Marriott being built by Prospera Hotels Inc., and a 634-room Westin, which is a redevelopment of the former Anabella Hotel by Wincome Group.

Disney was set to receive $267 million in rebates for its 700-room luxury hotel, which had been scheduled to open in 2021, from an Anaheim tax incentive program geared toward developers who build luxury hotels of Four Diamond or higher quality. The initiative was created in three years ago with the intention of boosting its supply of luxury hotels.

After Disney relocated portions of the project during the planning process, city officials informed the company this year that the planned hotel no longer fell fully within set boundaries of the incentive zone.

Disney placed the project on hold before announcing it was nixing it altogether before construction even began, in a reflection of the growing tensions between the Burbank-based entertainment company and the city where its amusement park and other hotels and developments have thrived for decades. The company receives a number of other financial incentives from the city of Anaheim that have caused tension in recent months.

“We’ve taken the time to review the economics of our proposed Four Diamond hotel for Anaheim and have made the final decision to cancel the project,” said Disneyland spokeswoman Liz Jaeger, in a statement. “While this is disappointing for many, the conditions and agreements that stimulated this investment in Anaheim no longer exist and we must therefore adjust our long-term investment strategy.”

Before scrapping its hotel project, Disney asked the city to remove it from development incentive programs and announced plans to raise wages for its current Disneyland hotel workers ahead of the November vote.

Reay said it remains “very difficult” for developers to make four- or five-star-level hotels profitable operations in Anaheim.

In addition to potentially higher labor costs for service-heavy luxury hotels, there is also the matter of rising construction costs, which make such hotels financially feasible primarily in markets with the highest average daily room rates. In California, that includes coastal markets, Northern California wine country, and upscale Los Angeles neighborhoods like West Hollywood and West Los Angeles.

But there’s at least one sign that luxury developers aren’t scared of Anaheim entirely. A third luxury hotel was recently approved by Anaheim officials. The 326-room Radisson Blu by BPM Real Estate Group is expected to open around 2020 about a mile from Disneyland and outside the city’s development incentive zone.

Reay said he’s waiting to see how the upcoming Radisson Blu performs after it’s completed at an estimated cost of $170 million, or $521,000 per room.

“This is the first luxury hotel planned in Anaheim that will be built without tax credits, not counting the California Grand hotel, opened back in 2001,” Reay said. “Anaheim is an untested market for luxury hotels, so it will be interesting to see how the Westin and JW Marriott perform, and then the Radisson Blu. If they are successful and can get the desired rates, then this may help spur more competition in this segment.”

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