|By Suzanne Marta, The Dallas Morning News
Knight Ridder/Tribune Business News
May 4, 2006 - Things are about to get ugly in the genteel world of Dallas' fanciest hotels.
In the next year, an onslaught of projects is set to double the city's supply of high-end lodging. Many industry watchers worry that Dallas' fragile hotel market doesn't have enough demand to support an excess of 1,400 luxury rooms.
Nationally, luxury hotels are outpacing the industry. But Dallas' market has been slow to recover since the economic downturn in 2001. Occupancy rates only recently climbed to the mid- to high 60s.
"How do you spell bloodbath?" said John Keeling, a senior vice president with PKF Consulting based in Houston. "The demand at that end of the market isn't deep enough."
For 25 years, The Mansion on Turtle Creek has comfortably held the city's top spot for visitors and locals alike. On a recent Saturday evening, elegant couples twirled around on the cozy dance floor, grooving to the light rock played by a house band. Along a banquette, a young pair celebrated their engagement.
Now, joining the Mansion and the other luxury properties in the area in the next two months will be the W Dallas Victory Hotel and Hotel Palomar. A Ritz-Carlton follows next year, followed by Joule Hotel in 2008. The Stoneleigh Hotel, built in 1923, is set to undergo a $28 million renovation next month to transform it into a luxury property next spring.
Several other hotel projects lingering in the background include a Mandarin Oriental, which is expected to join Hillwood Capital's tony Victory development.
While the new competition will probably mean some dip in occupancy rates or room prices, executives at the existing hotels say they aren't going to cede the market without a fight.
"We've fought to get this far, and we'll keep fighting to get it," said Tracie Houston, Hotel ZaZa's regional director of sales. "We might not get the same occupancy and rate, but it will still be good."
Robert Boulogne, chief operating officer of Mansion and Hotel Crescent Court parent Rosewood Hotels, said a strengthening economy and recent improvements around downtown will help create the necessary demand for the city to absorb the new rooms.
"Dallas is ready," he said.
And the impact from the new projects may be deceiving.
Although industry analysts categorize the new hotels as luxury, not all are going after the same customers.
For example, at Hotel ZaZa, the vast majority of guests during the week are celebrities and style-conscious business travelers. But on the weekends, the crowd is more local as Dallas residents look for a close-in getaway. In contrast, the Mansion caters primarily to what some call the "carriage" class -- monied customers who put a premium on service and elegance.
"The term 'luxury' is overused," Mr. Boulogne said.
The projects that Rosewood is guarding against are the Ritz-Carlton and the Mandarin, which bring powerful and internationally known brands, something Mr. Boulogne said could help spur demand.
"It gives credibility to the city," he said. "Ritz brings a lot to the table. We'll probably duke it out with some accounts, but it'll work out."
Noeha Coutry, the Ritz's Dallas-based director of sales and marketing said demand has already been strong.
"A lot of our customers have been clamoring for a Ritz-Carlton to be in Dallas," Ms. Coutry said.
The Mansion is already feeling pressure from new rivals.
The venerable hotel lost its marquee chef, Dean Fearing, to the Ritz-Carlton, where he'll be establishing his own restaurant. And last month, the hotel's owners revealed they were seeking a buyer.
Mr. Boulogne said the new projects have pushed the company to "rethink ...what kind of investment we need to have in the properties."
The Four Seasons in Las Colinas has already made changes to give the hotel a boost in the face of new competition. It recently opened part of a $20 million expansion project that included new villas, event space and upgrades to its sports club.
"You never want to be a has-been in this business," said Craig Reid, the Four Seasons' general manager and regional vice president, when the project was announced. "We're rebooting."
Nationally, prices for luxury hotel rooms are expected to grow 8.2 percent during 2006, compared with 5.8 percent for the industry overall, according to forecasts by PricewaterhouseCoopers. Demand is expected to grow 3.3 percent for luxury stays, compared with 2.9 percent overall.
And increased occupancies will also help to push guests to higher-end properties.
"There's a lot of trading up that's going on as occupancy rates grow," said Bjorn Hanson, a lodging consultant with PricewaterhouseCoopers.
But Dallas' hotel market has faced stiff competition from entertainment-friendly destinations such as Orlando, Fla., and Las Vegas. That's made it difficult to attract so-called citywide events that fill downtown and other close-in hotels and drive up room prices.
Occupancy rates downtown, which dipped below 50 percent five years ago, have just started to come back.
Additionally, the area doesn't have many barriers to entry, making it too easy to add supply and dilute room prices, said Greg Crown, a Dallas-based hospitality industry consultant with PKF Consulting.
As a result, Dallas room prices are chronically lower than its peer cities.
Still, some properties, such as Hotel ZaZa, report significantly higher occupancy rates, a testament to the power of creating a niche.
"People are willing to pay more for an experience," said Hotel ZaZa's Ms. Houston. Occupancy at the hotel surpassed 80 percent for 2005. It regularly sells out on weekends.
"Our No. 1 customer complaint is that they can't get in," she said.
And new developments such as Victory are creating a buzz that will translate into new business.
"Dallas has a lot to offer," said Rob Gormley, general manager of the W Dallas Victory. "People are living downtown and making it a desirable location. That dynamic will create success for the W. Five years from now, you're not even going to recognize downtown."
A 20-year industry veteran, Mr. Gormley shepherded the W's entry into downtown San Diego, which was similarly undergoing a rebirth.
"Everyone was very pessimistic about us having a hotel there, but we opened and now things are going gangbusters," he said. "The same thing is going to happen in Dallas."
Mr. Gormley said he is not worried about so much supply coming on at once.
"The mix is perfect, and we're very positive about it," he said.
W is technically considered an upper upscale brand, but similar to Dallas' Hotel ZaZa, many analysts push it into the luxury category because of the prices it commands.
The condo factor
Many believe the new hotels wouldn't be built without their companion condo projects, which allow owners to get more favorable financing and a quicker return on their investment.
Dallas will be W's first effort at condos, which will become standard in the hotelier's future projects. The W's condos at Victory are 70 percent sold, and demand has been strong. About 30 percent of Hotel Palomar's condos have been sold. The Stoneleigh is adding 101 condos and has sold almost 30 percent of them.
The Ritz's condo project was so successful that the hotel is working on plans for a second phase.
"I don't think the W or the Ritz would have made economic sense without the condos," Mr. Crown said. "They're too expensive, and there's not enough market."
The city's riskiest project could be the Hotel Palomar, whose location near Mockingbird Station is in an untested lodging market.
The typical rate along North Central Expressway south of LBJ Freeway is about $100, less than half of the $289 room rate Hotel Palomar is projecting.
Jim Alderman, senior vice president of acquisitions and development for San Francisco-based Kimpton Hotels & Restaurants LLC, said there hasn't been any hotel offering of this caliber that could charge such a rate.
And with the popularity of nearby Uptown, Kimpton hopes to capture some of the existing customers in the area, along with a Park Cities clientele, with its "urban resort."
Dallas was an obvious choice for the boutique hotel operator, which has been expanding its footprint throughout North America.
"We get lots of Kimpton customers who would be staying with us in Dallas if we had a hotel," Mr. Alderman said.
Real estate editor Steve Brown contributed to this report.
What do luxury hotels have that customers are willing to pay so much for? The industry identifies the segment by price -- typically including properties with room prices in the top 10 to 15 percent of the market.
Some key features that rating guides look for:
-- Highly attentive staff
-- Multiple restaurants or bars, including a high-end specialty restaurant
-- In-room mini-bars
-- Valet and shoe shine service
-- Linens with high thread counts and nightly turn-down service
SOURCE: Dallas Morning News research
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