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‘Perfect storm’ slows historically fast Phoenix tourism recovery

The Hotel Palomar in downtown Phoenix. (Photo by Ryan Cook/RJ Cook Photography)

Phoenix area’s recovery time after the slump in tourism following the terrorist attacks of 9/11 was among the top five fastest of major metropolitan areas in the nation. But recovering to peak tourism levels following the economic crash of 2008 has proven much more difficult.

The local tourism industry is projected to have a peak market level recovery period of 90-plus months — the longest such span of time for the top 25 markets in the country, according to Chad Church of Smith Travel Research, which tracks supply and demand in the hotel industry worldwide. Four years after a sharp decline in business travel and overall tourism nationwide in 2009, Church projects full recovery for the Phoenix market by late 2014 and growth in 2015.

Events during 2008-2010 created a perfect storm that disrupted tourism in Arizona, says Bob Hayward of Warnick and Company, a national hospitality industry consulting firm with offices in Phoenix. The ingredients for this storm included the near economic collapse of the nation; the “AIG effect,” which prompted cutbacks in lavish business travel and entertainment; backlash over SB1070, budget cuts to the Arizona Office of Tourism and city convention and visitor bureaus and an excess supply of hotel rooms, Hayward says.

Michael Martin, executive vice president of Visit Tempe, the city’s tourism office, says the Phoenix area market historically has rebounded faster than the top 25 markets nationwide, going back as far as economic downturns in the 1980s, but not this time.

“It could be due to airfares,” Martin says, “We are a fly-in destination for most visitors.”

The importance of tourism is easy to overlook, says Scott Dunn of the Greater Phoenix Convention and Visitors Bureau.

“The average hotel room generates more tax revenue than the average home in the Phoenix area, and it’s one-quarter the size,” he says.

The gross tax yield on a hotel room is $6,300 per year; 27 percent of that is property tax. That is 8 percent more than the median property tax on a home in the Valley, Dunn says.

Tourism ranks fourth among Arizona export-oriented industries after agriculture, mining, and manufacturing. It generated 4.8 percent of economic activity in 2010, according to reports from the Arizona Office of Tourism.

Gauging tourism health

The occupancy levels and rates paid for hotel rooms provide a good indicator of the health of the tourism industry, says Debbie Johnson, president and CEO of the Arizona Lodging and Tourism Association.

While many types of businesses benefit from visitors, hotels are primarily used by business travelers and tourists, she says.

The supply of hotel rooms in the Phoenix area still exceeds the current demand, industry analysts say. The occupancy rate has hovered from 52 percent to 58 percent since 2009, following a 10-year high of 68 percent in 2006.

New hotels and expansions of existing hotels were planned in response to growth in the middle of the decade, but by the time these projects were ready to open, the demand was already decreasing. In 2006, there were 53,400 rooms in metropolitan Phoenix. By 2010, there were 60,500, an increase of 7,100, with the biggest increase in rooms coming during 2009. Construction slowed through 2012, as only 1,100 rooms were added in that time span, according to Smith Travel Research.

As demand grows, both occupancy rates and the average amount charged per room will increase. Discounting room rates because of an oversupply stalls revenue growth for the hotel industry.

Anatomy of the perfect storm

The Arizona Office of Tourism spends nearly 80 percent of its budget on marketing and promoting Arizona as a travel destination. The agency’s budget consists of an appropriation from the state’s general fund, designated funding from the 2002 Indian Gaming Preservation and Self-Reliance Act and money from the Arizona Sports and Tourism Authority.

For fiscal 2013, the entire budget is about $19 million. However, during the two previous fiscal years, the agency received no appropriation from the general fund, so the annual budget was about $12 million during those years, says Kiva Couchon, director of communications for the office.

“Because of the budget allocation from the general fund for FY13, our agency has been able to produce six advertising campaigns and increase our marketing efforts to promote Arizona as a travel destination to a more global audience than in previous years,” Couchon says.

“Additional funding enables us to better promote Arizona in various ways and encourage visitation to our state which generates thousands of jobs, millions in earnings and billions in tax revenues.”

San Francisco, which required 37 months to recover — the least amount of time among the 25 areas studied — achieved growth by late 2011 because of aggressive promotion that offered reduced rates for hotels and meeting sites, according to Church of Smith Travel Research. The lower rates attracted conventions, groups and individuals who couldn’t afford that city before. In a market of heightened competition, the Phoenix area was bypassed, Hayward says.

Couchon notes that some states, including California and Florida, promote tourism with the financial help of major privately owned attractions, such as Disneyland and Universal Studios, an advantage not available to Arizona and many other states.

Adding to the storm was SB1070, the controversial illegal immigration legislation signed into law by Gov. Jan Brewer in April 2010.  While some travel to Arizona was canceled in the immediate aftermath that gained national attention, long-range effects are still being felt.

Many large groups and conventions book years in advance of their meetings, and they skipped Phoenix to avoid the controversy for a while.

“Significant revenue was lost (due to SB1070),” Hayward says, “But the dust has settled now, and current bookings, though still soft through 2014, look stronger in 2015.”

In 2009, the first year after the Phoenix Convention Center completed its expansion, it hosted 59 groups and 310,000 attendees who spent $450 million. In 2012, there were 59 groups with 190,000 attendees who spent $276 million, says Dunn of the Greater Phoenix Convention and Visitors Bureau. Dunn says the center has approximately 60 confirmed and tentative bookings each year for 2014 and 2015.

Corporate convention planners also had another reason to steer clear of the Phoenix area at the end of decade. In the wake of the economic crisis in 2008 and subsequent federal government bailouts of big corporations and major banking institutions, lavish corporate spending for travel, meetings and entertainment came under sharp scrutiny.

Dubbed the “AIG effect” in the travel industry, the resulting austerity measures had a harsh impact on the hospitality business.

Likewise, government-sponsored travel and meeting plans were curtailed to cut costs in the face of budget woes.

“We’re not Vegas, but there was a period when there was an anti-resort backlash,” Dunn says.

Rise of the ‘staycation’

Although there has been some recovery, the overall economic outlook is still tentative for many businesses and individuals, Hayward says.

Echoing Martin of the Tempe tourism office, Hayward says Phoenix is a fly-in, rather than drive-to destination, due to the greater distance from other major U.S. cities. It is less expensive for people in Eastern and Midwestern cities to plan meetings and trips to destinations within driving distance.

That fact has boosted “staycations” in the off-peak summer months for Phoenix-area resorts. These properties have been increasingly offering deals to local residents since the economic downturn, Couchon says.

The discounted rates and no-cost travel are appealing to locals who want to enjoy a luxury setting at a fraction of winter rates.

The 242-room boutique Hotel Palomar opened in 2012 at CityScape in downtown Phoenix. Even though planning began seven years ago, before the recession, operator Kimpton Hotels decided to see the project all the way through to completion. The company sees the Phoenix market as a sound investment, and believes it offers a unique hotel experience here, says Marty Bertone, director of sales and marketing with the Palomar.

The Palomar has positioned itself as an urban resort that also serves convention guests, Bertone says.

For larger downtown Phoenix hotels that serve conventions, the competition to fill rooms has gotten increasingly fierce during the past five years. Marriott purchased and rebranded the 519-room Wyndham in downtown into the Renaissance Phoenix in December 2011. The Renaissance and the 1,000-room Sheraton — which opened downtown in 2008 — are considered destination hotels that generate demand, instead of relying on existing demand.

Renaissance General Manager Paige Lund says the new brand is increasing sales for the property. The hotel serves guests attending conventions at the Phoenix Convention Center, plus groups for smaller meetings and conferences, Lund says.

Lund, who has been working in the hotel business in the Phoenix area since 1998, says one change she has seen is that groups are booking on shorter notice, sometimes within the month.

“A lack of certainty in the future causes folks to keep things close to the vest,” Lund says, “Groups are still very conscious of travel expense.”

While exact figures are not yet available, Johnson of the Arizona Lodging and Tourism Association says March 2013 was a very strong month for tourism due to the Cactus League, spring breaks and Phoenix’s weather.

 

Tourism Spending Snapshot

The Arizona Hospitality Research & Resource Center (AHRRC) at Northern Arizona University calculates the tourism impact on all businesses for gross sales and tax revenues, based on Arizona Department of Revenue figures. The organization provides information to the Arizona Office of Tourism and other public and private sector clients.

According to AHRRC information:

In Maricopa County, total travel spending was $11 billion in 2011, based on the most recent figures available.

Approximately 14 percent, or $1.4 billion was spent on lodging; 22 percent, or $2.4 billion was spent on food and beverage service and $2 billion, or 20 percent, was spent on local transportation and gas.

For the state of Arizona, total tourism spending was $18 billion for 2011.

 

 

Promoting Arizona

The Arizona Office of Tourism’s fiscal year 2013 budget is approximately $19 million. That total includes the restoration of a $7 million appropriation from the state’s general fund, after two years with no funding from that source, says Kiva Couchon, AZOT director of communications.

The agency also receives funding from Proposition 202, enacted in 2002, which designates that 8 percent of money collected by the state from Indian gaming proceeds goes to AZOT. The tourism office projects $6.2 million this year from that source. The Arizona Sports and Tourism Authority also provides money to the office specifically for marketing Maricopa County tourism. Couchon estimates that total at $6.9 million this year.

The total tourism office budget projected for fiscal year 2013 restores funding to the 2010 level, which was $19 million, after two years of funding at about two-thirds the normal budget, or $12 million.

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