BusinessReport.com

Joachim “Jon” Fels defected from the former East Germany in 1961 after finally making it over the Berlin Wall on his seventh attempt. Despite not speaking a word of English when he arrived, he graduated from hotel school in New York three years later and was managing the 360-room Kennedy Airport Hilton three years after that.

In his nearly four decades in the hospitality business, he’s worked all over the country and internationally, and he’s either brokered, consulted or managed eight hotels in New Orleans and six in Baton Rouge, his adopted hometown. Fels has been semi-retired since 2005 but still follows the market closely, and he says many local hotels are headed for rough times.

“There’s going to be some serious hardship” caused by rampant overbuilding, Fels says. But while the rapid proliferation of new hotels may be puzzling from a big-picture perspective, individual developers and hoteliers do have business plans that make sense—at least to them.

According to the Baton Rouge Hospitality Management Association, more than 10 new hotels with a total of nearly 2,000 rooms are either planned or under construction in the Baton Rouge area. Fels calculates that’s roughly one million additional room nights for sale annually. A few more hotels are planned but have yet to be announced.

Meanwhile, hotel occupancy dropped 3.6% in August, the most recent month for which data is available, and a whopping 14% from August 2006, according to Smith Travel Research and the Louisiana Office of Tourism.

“Where is the business coming from?” Fels wonders. “Baton Rouge is not a first-tier destination. This is going overboard.”

Fels is reminded of the hotel frenzy that preceded the 1984 World’s Fair in New Orleans, which holds the distinction of being the only such fair to declare bankruptcy. Hotels were built in New Orleans and Baton Rouge for an anticipated flood of tourists that turned out to be more of a trickle. The temporary post-Katrina population influx here may have created a similar building euphoria. A healthy economy, record profits in the hotel business nationwide and easy access to capital through tax incremental financing, GO Zone money and single-digit interest rates are also factors, he says.

“Twenty to 30 years ago, everyone wanted to open a restaurant,” Fels says. “Today everyone wants to be in the hotel business.”

In general, the hotel business is cyclical; by Fels’ reckoning, national profitability should peak next year before starting to decline. If developers here build everything they say they’ll build, the national decline will coincide with a serious local glut. Many local properties, particularly the older ones, will be in trouble by 2010 at the latest, he says.

“The hotel industry has a herd mentality,” says Tommy Spinosa of JTS Interests. “They all run in packs.” JTS is planning a 100-room hotel as part of its mixed-use Perkins Rowe development at Bluebonnet Boulevard and Perkins Road. Spinosa wouldn’t specify the brand of hotel, saying he’s still in negotiation, but the Hospitality Management Association has listed the property as a Hilton Garden Inn.

Spinosa says some developers will likely back out, realizing the increasing local room supply and the high cost of materials and labor make their hotel projects unadvisable. But he’s confident that synergy with the rest of Perkins Rowe will make his hotel a success, because hotels do well where there’s entertainment available for the guests. At Perkins Rowe, there are places to shop and hang out, making Spinosa’s hotel a more appealing destination than one plopped down next to an interstate overpass, he says.

Drury Hotels is expecting a different sort of synergy. Company spokeswoman Alexis Nugent says their planned 180-room hotel at Interstate 10 and Essen Lane will draw on brand recognition from other properties in New Orleans and Lafayette, a strategy she says has worked well in other markets. It’s a long-term investment the company plans to sustain through the ups and downs.

“We’re not going to stop building because things may not look great at that particular moment,” she says.

Richard Preis is the developer of Howell Place along Harding Boulevard near Interstate 110, which includes a new Hilton Garden Inn and three more hotels slated to open next year—a Holiday Inn Express, Marriott Spring Hill Suites and Microtel Inn.

He says the north Baton Rouge market is actually underserved, claiming his research shows industries in the area book as many as 90,000 room nights annually in south Baton Rouge hotels, and argues that most of the local business community ignore the ample opportunities found on the other side of Florida Boulevard.

“It’s typical Baton Rouge; everybody missed the boat,” Preis says.

Hoping to attract the upscale customer is the 350-room Marriott Renaissance, expected to open on Bluebonnet Boulevard in about a year. Developer Mike Wampold says it’s the first truly full-service hotel built in Baton Rouge in at least 20 years, and feels it will stand out from the crowd.

“Nobody else is doing something even close to as nice as this,” he says.

Fels says the modern traveler tends to prefer newer hotels with amenities like Jacuzzis and health clubs, so the older, cheaper varieties will likely be in trouble first. Baton Rouge might actually have a shortage of the sort of upscale, full-service hotels that appeal to the convention crowd, he says, but most of the properties in the pipeline cater to the budget or mid-market customer.