Dear City Council-
I appreciate Justin sharing with me the staff report and news that the City is considering a ballot measure for increasing the TOT by almost 30% over the next two years. I know this has caught a few local hoteliers off-guard, and while Im currently out of the country and cannot attend the session in person, I would like to share some thoughts here in email for your consideration.
1. Local Hotels Have Not Recovered From The Pandemic & New Supply
In 2017, the competitive set of upscale, full-service hotels in Menlo Park & Palo Alto had a market occupancy rate of 76%. Mid-70s is a target occupancy rate for a healthy hotel market.
In 2023, the competitive set had a market occupancy of 65%. This occupancy rate, 11 points below the stabilized 2017 level, is not at a long-term sustainable level for a healthy local hotel industry. (source: Smith Travel Research)
And for the previous three years, Menlo Park hotels have suffered greatly...this comp set had an occupancy rate of just 55% in 2022, 25% in 2021, and much worse in 2020. These have been very challenging years for all of us in the local hotel business, as inflation and wage increases have continued to increase operating expenses while our occupancy has faltered.
The pandemics lingering impact on business travel (the markets core customer) is still impacting us, as is the new supply of additional hotel rooms in the market (Citizen M, The Graduate in PA, NIA and Park James) since 2018.
2. The Citys TOT Revenue Has Increased Well Beyond Inflation
While individual hotels in Menlo Park are struggling with low occupancy and high operating costs, the 1) addition of the aforementioned new hotel supply and 2) increased average room rates have increased the Citys TOT revenue significantly.
In 2017, the City took in $6,662,631 in TOT.
In 2023, the City took in $11,301,915 in TOT.
This is a 70% increase in tax revenue over six years which yields a 9.2% compound annual growth rate. This is remarkable.
The Citys current fiscal issues are certainly not due to a shortfall of TOT dollars.
3. Menlo Park Is Not Palo Alto
Palo Alto is the only city in the region with a 15.5% TOT. Most local, comparable cities are at 12%. My company operates six other hotels in cities like Monterey, Lafayette, Yountville, St Helena, etc. and TOT in those cities ranges from 9.7%-13%.
The cities near the airport are at 14%, as well as the city of San Francisco is at 14%. Menlo Park is not SF nor the unique airport sub-market.
Palo Alto is an outlier. But it also has significantly more demand than Menlo Park to justify a premium. Looking at Google Trends search data over the last twelve months, the term Hotels Palo Alto was searched over 8x more than the term Hotels Menlo Park. Palo Alto offers awareness, brand and demand generators for transient lodging guests that Menlo Park simply does not have.
In Closing
Your Menlo Park hotel industry has had a very challenging past four years, but in spite of this it has delivered excellent tax receipts to the Citys coffers.
The more you tax something, the less of it you get. Now is not the time for Menlo Park hotels to be less competitive, more expensive and attract fewer guests.
Putting the outlier of Palo Alto aside for the moment, the regional market for TOT rates is firmly in 11%-14% range. Menlo Park should remain in the market range and not follow Palo Alto as a high tax outlier.
If the City feels it must increase its TOT rate, then a more modest 1%-2% increase over a two-three year period seems more measured. If the City goes ahead with the proposed 30% increase and moves Menlo Park to be one of the highest taxed cities in Nor Cal, then I dont believe you will have the support of the local hotels for this ballot initiative.
Thank you for your consideration.
Greg Alden
Stanford Park Hotel
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Greg Alden
