Ritz-Carlton Vegas Closure Bodes Ill

The imminent closure of the 348-room Ritz-Carlton Lake Las Vegas property, the first closure in the brand's history, marks the latest sign of trouble in the luxury hotel tier. Although the tier is seeing a few signs of recovery, analysts expect more foreclosures and perhaps a few more closures before a rebound.

Lake Las Vegas' Ritz-Carlton, a convention and leisure resort located about 17 miles off the Las Vegas Strip, will cease operations on May 2, the date when its owner, a unit of Deutsche Bank that acquired the property in a foreclosure sale last year, will cease funding it. Casino MonteLago, Lake Las Vegas' sole gaming destination, soon followed the Ritz's announcement with its own closing announcement.

The Ritz property, which opened in February 2003, is hardly alone in its woes, although it is one of the more extreme examples. Much like the Ritz, several other luxury hotels faced foreclosure and changed hands last year, including the St. Regis Monarch Beach, the site of the infamous post-bailout AIG incentive trip that led to the coinage of the "AIG effect." More recently, reports have circulated that the iconic Four Seasons New York will be put up for sale while its owner, billionaire Ty Warner, is in peril of default.

Bjorn Hanson, an associate professor at New York University's Tisch Center, said many of the recently built properties are in particular danger. Because of the time lag from hotel development to completed construction, many came online in a very different economy than their owners had anticipated.

"There are some high-visibility luxury resorts and even one or two luxury urban hotels that were built when everything was different," Hanson said. "Some were built with the assumption that things would keep getting better. The economics were based not on market conditions remaining as good as they were in 2007 but improving to make the economics work."

To compound matters, the U.S. luxury tier saw an unprecedented 8,000 new rooms added in 2009, an increase of about 8.9 percent, according to Smith Travel Research. This contributed to an overall occupancy drop of 8.7 percent.

Ritz-Carlton spokesperson Vivian Deuschl said in the case of Lake Las Vegas, the property faced not only the bad economy but also the double whammy perception that both luxury properties and popular leisure destinations should be off limits for corporate meeting purposes. In Las Vegas, average rates fell 22 percent and occupancy dropped 4.5 percent year-over-year in 2009, according to the Las Vegas Convention and Visitors Authority.

Some meeting planners have told MeetingNews that they've been instructed to pass on luxury properties even when they can get better deals there than at lower-profile upper upscale properties.

"2009 was the most challenging year our company has had to face," Deuschl said. "We lost a tremendous amount of business that was our core. They were even willing to pay huge penalties to avoid having meetings that were actually planned, sometimes as much as it would have cost to have the actual meeting."

Marriott International in February reported that Ritz-Carlton in 2009 had the steepest year-over-year drops in revenue per available room and average daily rate of all its brands. RevPAR for comparable system-wide North American properties dropped by 23.1 percent compared with 2008, and average daily rate dropped by 14.9 percent to $280.76. Its rates fared slightly better than the U.S. luxury tier overall, which saw rates plummet by 16.3 percent in 2009, Smith Travel Research reported.

NYU's Hanson said the troubled real estate market is compounding financial difficulties for newer luxury properties with residential components. "In many cases, these hotels' models had depended on a residential component to subsidize the hotel development costs," according to Hanson.

Luxury properties' ancillary services also have taken a hit. Deuschl said many corporate planners who had traditionally included golf and spa services changed to a pay-as-you-go format, cutting revenues.

Luxury hotel spas in 2009 actually showed a slight increase in treatment room utilization compared with 2008, thanks in part to a fourth-quarter resurgence in activity, according to Smith Travel Research. At the same time, luxury hotel spas cut treatment rates by 4.5 percent compared with 2008.

While most luxury properties are reluctant to slash room rates, knowing it would be difficult to raise them again after a recovery, they are offering unprecedented group packages. Ritz-Carlton, for example, has thrown in deals like free nights and free Internet usage, which it has not done before, Deuschl said. The company also is including social responsibility components in meetings, replacing recreational activity with work at orphanages or wildlife preserves, she said.

"We've had to be extremely creative with planners and bosses, and our salespeople had to work twice as hard to attract new meetings while retaining what they were losing," Deuschl said.

Luxury hoteliers also said they see a few positive signs this year. Smith Travel Research expects U.S. hotel industry stabilization this year to begin at the top tiers, and the luxury tier was the only one to see a year-over-year increase in occupancy during the fourth quarter of 2009. Christie Hicks, senior vice president of global sales at Starwood Hotels & Resorts, reported strong group booking performance in December and a good up-tick in activity during the first weeks of this year, indicating pent-up demand.

"We are seeing some good luxury bookings on both an individual and group basis," Hicks said. "People still like to take care of themselves."

Deuschl, meanwhile, said Ritz-Carlton continues to forge ahead. It opened the first luxury hotel property in Charlotte, N.C., late last year, recently opened its Dove Mountain Luxury Resort in Tucson, Ariz., and has openings slated this year in Dubai, Shanghai, Toronto, Los Angeles and Hong Kong, where Ritz-Carlton will open the tallest hotel in the world.

Originally published March 1, 2010