Over the past few years, hotel subsidies have become a point of political contention in Anaheim. Of course, this is the only reaction that can be anticipated when a municipality is effectively deciding to return 70% of the taxes it collects from a business entity. It becomes even more contentious when the aforementioned form of taxation (transient occupancy tax), is the primary source of revenue that comprises Anaheim’s general fund.
Realistically, this debate boils down to two opposing sides: one that feels subsidies are necessary to attract four diamond hotel developers, and one that feels the current market conditions make subsidies unnecessary. At least, that’s what it SHOULD be about. It shouldn’t be about returning money to hotels, or about the benefits that the hotels will bring in 20+ years. It SHOULD be about whether or not the subsidies are necessary to attract hotel developers.
The goal in this piece will be to examine market conditions and delve into the arguments being made by the opposing sides.
Just as a warning, as someone with a degree in economics, I am opposed to hotel subsidies based solely on the current market conditions.
The hospitality industry has come a long way in the past 40 years. In the words of Mark Woodworth, a key figure in the hospitality research industry, “this is probably the best time that the industry has seen, in terms of fundamentals being solid, going back to the mid-1970s.”
In fact, there is not single research paper, news article, or even a quote suggesting that the hospitality industry is in need of government assistance. It would appear that the only individuals advocating for subsidies hotel are those involved with local government. Occupancy rates are at all time highs, average daily rates are at all time highs, and revenue per room is at an all time high. In addition to those facts, annual demand growth is current outpacing supply growth by a significant 1.7%.
In the words of STR’s president (STR in this case is the nation’s leading organization for research on the hospitality industry), “The next couple years will be great unless there’s an unknown factor we can anticipate.” This quote was given during an interview in 2014 and, as of yet, that “unknown factor” has yet to come into play.
Turning to a macroeconomic approach, FDI’s in the United States are at all time highs. In fact, FDIs are currently higher than at any point in the past two decades. For those unfamiliar with macroeconomic principles, FDIs are foreign direct investments. Essentially, this figure represents foreign firms investing in the United States, instead of their home countries.
Domestic investment is currently rising, and domestic savings are dropping. Not only are firms investing heavily in the United States, consumers are also showing a willingness to once again increase their consumption. This reaction is to be expected during periods of economic stimulus, especially after a recession. Higher consumption amongst the general public has a direct correlation to tourism expenditures. This potentially indicates that investment in hotel development is likely, given that demand for hotel accommodations will continue to experience growth. Basic economic principles, quite literally as basic as it gets, dictate that suppliers will always work to meet newly generated demand. Given that leading experts in hospitality have also predicted such, it is a fair bet to say that I’m correct in the above assumption.
Turning to a more tourist oriented approach:
International travel to the United States is predicted to increase at a rate of 3.1% annually through 2020. So while the United States is experiencing relatively unprecedented investment from abroad, the United States is also experiencing a boom in the exportation of goods and services (represented by tourists from abroad spending money to travel here, and therein purchasing goods while they are here). In fact, tourism has long been acknowledged as America’s largest service export. In addition to the influx of international tourists, overall tourist expenditures are at all time highs.
With all of that being said, I am left with the general feeling that the council members in favor of subsidies are either terrible at doing their own research, or have simply been brainwashed into doing whatever they’re told to do by outside interests. They are effectively proposing subsidies for an industry in which there is literally not a single shred of evidence indicating that government assistance is needed to guarantee success.
One of the more common arguments I have heard from those in favor of utilizing subsidies to attract four diamond hotel developers has been reliant on the fact that no four diamond hotels have been constructed in Anaheim in 15 years (the most recent being the Grand Californian which was finished in 2001).
For that reason, I am left with no choice but to bring up the past 15 years of U.S. History, and why developers would not have been interested during that period of time.
Trouble in the hospitality industry really started on September 11th, 2001. Needless to say, the general public was not keen on air travel following the worst terror attack in U.S. History. In fact, it took until early 2004 for tourism to reach levels that once again matched the pre-9/11 days.
With that being said, the industry experienced three’ish’ good years before everything once again returned to shit during, and following, the financial collapse of 2007/2008.
However, as was discussed earlier, the industry, now, has succeeded in not only surpassing pre-Great Recession levels, they have been able to reach a level of growth greater than that which has been experienced over the past 40 years!
Which begs the question: why the hell would anyone think that now is the time to start providing government assistance to the hospitality industry? Do they fail to realize that the industry, as a whole, is doing better than it has over the entirety of modern American history?
Given the fact that Disney expanded the Grand California Resort a few years after 9/11 due to unprecedented growth in demand, the argument can easily be made that demand for four-diamond accommodations does, indeed, exist in Anaheim.
If anything, the Hotel Incentive Program is simply a grab-bag for unneeded financial assistance. Anaheim is supporting an industry that does not need support, and they’re handing residents the short end of the stick in their desire to do so.
Lastly, when a developer sees an opportunity to take advantage of a financial kickbacks, of course they’re going to request them, and then pretend they wouldn’t build a hotel without them. Given that the first subsidy for the Gardenwalk Hotel entered negotiations in 2012, no one, I repeat NO ONE, even knows if developers would be interested in constructing a hotel without a subsidy. Prior to 2012, the recession would have prevented any such investment. Post-2012, the industry entered a period of boom but, of course, that’s when our council decided it was time to start subsidizing. Anaheim’s council majority seems to lack not only common sense, but also any sense of the basics of supply and demand.
I will end by repeating this: local government officials are the ONLY people saying that the industry needs subsidies. Those in the industry readily admit that it is stronger than it has been in the past 40 years. If that doesn’t set off alarms, then I don’t know what does.
Daniel Robbins is a 22 year resident of Anaheim and a recent graduate of CSUF with a degree in Economics.
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