St. Regis and other high-end O.C. hotels shake off the stigma of 2008’s AIG episode as bookings from businesses rebound.
Johnny So, general manager of the St. Regis Monarch Beach Resort, is used to hearing superlatives about his hotel, a 172-acre Tuscan-style retreat perched atop a hillside in Dana Point with a stunning view of the Pacific coastline.
“When you check into this Forbes Travel Guide Five-Star hotel, you’ll feel like you’re visiting an aristocrat’s private mansion,” the travel guide gushed in a review last year.
St. Regis Monarch Beach Resort
Opened: August 2001
Current owner: Washington Holdings, Seattle
Room rates: Mid-$300s to $6,000
Amenities: 18-hole championship golf course designed by Robert Trent Jones, Jr.; Spa Gaucin; three swimming pools; six restaurants including the Forbes four-star Stonehill Tavern; butler service
Yet in October 2008, the very things that made the St. Regis such a singular experience turned overnight into the very essence of Wall Street excess. The resort had the misfortune of hosting a $443,000 bash for top-earning salesmen of an American International Group subsidiary, less than a week after AIG received an $85 billion Federal Reserve bailout.
The story, first reported in the Orange County Register and picked up in blaring headlines across the country, ultimately led to a congressional hearing. Testimony revealed that the AIG American General group spent $23,380 for spa services at the St. Regis, and $1,488 at the Vogue Salon – at a time when thousands of U.S. workers were losing their jobs.
“No one wants to be on the cover of The Wall Street Journal for spending money frivolously,” said Jan Freitag, vice president at STR, a hospitality industry research firm. Populist outrage built over the following months, with demands that AIG executives return $165 million of bonuses and, according to the company, death threats against employees.
But if the St. Regis was the poster child for lavish spending in the face of an economic calamity, it wasn’t alone. From California to Las Vegas to New York, resorts suffered as big corporate clients cut back on travel and conventions.
Orange County’s luxury hotels were hit particularly hard. By December, guests occupied barely 1 in 3 of the county’s priciest resort rooms, according to STR data. Revenues plunged nearly 37 percent from the previous year.
The St. Regis was built during the heady days of the dot-com boom. The Newport Beach-based Makarechian family developed it as a $240 million specialty property aimed at high-end guests. Dana Point officials were thrilled with a new resort that was expected to add $3 million in annual bed taxes to city coffers.
About 1,500 invitees attended the grand opening in August 2001, including stars David Hasselhoff and Angela Bassett. Singer Chris Isaak performed.
But within a month, fallout from the 9/11 terrorist attacks hit hotels. PKF Consulting, a hospitality industry research group, reported that hotel occupancy in south Orange County plunged to 30 percent that September, just as the St. Regis was getting going. Still, the new hotel weathered the relatively short 2001-02 recession. Boasting the county’s only five-star ranking from the Mobil Travel Guide, it earned a reputation as the place for the glitterati to be seen.
The tone was set by the Makarechians, whose Armenian patriarch, Hadi Makarechian, immigrated to the U.S. from Iran in 1965 to go to college in Buffalo, N.Y., then again in 1979 to go into business. He went on to build Capital Pacific Holdings Inc. in Newport Beach, which develops and builds residential projects in Arizona, California, Colorado and Texas. Maker Properties LLC, the hotel’s developer, is a spinoff of Capital Pacific run by Makarechian’s son, Paul.
Under Paul Makarechian, the St. Regis became known for its lavish parties. For its five-year anniversary celebration in 2006, the resort was decorated as the French “Chateau M.” Men in white powdered wigs and 18th-century uniforms attended to guests. One buffet table offered six kinds of caviar.
In 2008, the resort became the site for what is now the annual Dana Point Concours d’Elegance, a charity fundraiser featuring classic cars and motorcycles held on the hotel’s 18-hole Robert Trent Jones Jr.-designed golf course.
Orange County was just beginning to feel the effects of the subprime mortgage implosion in 2008, but Johnny So, the St. Regis general manager, said business was still strong into the fall.
“Because the real estate and financial services industries were so hard-hit by the collapse – and because they are very important sectors to our hotel’s business on local and national levels – we knew we would be significantly impacted,” So said. He noted that 60 percent of the resort’s revenues come from conferences and meetings, such as functions for Lehman Brothers and AIG.
CANCELING IN DROVES
After the AIG incident, everyone – including Congress and President Barack Obama – piled on to express disgust for any display of what could be considered Wall Street’s greed and cluelessness. The final blow to the hospitality industry came in February 2009, when Obama blasted the companies for handing out bonuses and perks when they were getting bailed out by the government.
“You can’t get corporate jets, you can’t go take a trip to Las Vegas or go down to the Super Bowl on the taxpayer’s dime,” he said.
Businesses, worried about getting lumped in with AIG, canceled conferences in droves. Business people who still traveled downsized to less-ostentatious lodging.
JD Shafer, general manager of the Waterfront Beach Resort, a Hilton Hotel in Huntington Beach, said the reaction was immediate.
“We were ground zero here in Orange County,” he said. “Anything with ‘resort’ in its name was like a dirty word, and travel to resorts became taboo.”
At the St. Regis, there suddenly were few takers for the spa’s $625 couples retreat.
“The resort still had group business,” said So. “But the ancillary spending at our amenities – the spa, food and beverage – decreased a bit as groups become more conservative.”
Cutting the hotel’s hallmark service was not an option. So said the St. Regis was able to avoid major layoffs. Others weren’t so lucky. By the end of 2009, 6,100 accommodation and food service workers countywide had lost their jobs, according to state employment data.
And while the St. Regis’ elegant doors remained open, Makar Properties fell behind on payments for its $300 million loan. A unit of Citigroup foreclosed on the hotel in 2009 and Washington Holdings, a real estate investment firm that holds equity and debt interests in hotel properties, took control in 2010.
LUXURY CLIMBS BACK
The new owner’s timing proved perfect. The hotel industry turned the corner in 2010 and started to see occupancies rise. Room rates at Orange County luxury hotels, which fell to an average $240 a night in February 2010, grew to $291 this February. In July, the latest data available, rates averaged $397, the highest since 2007.
So, who remained as general manager under the new owners, said the St. Regis just had its best summer since the financial crisis. Business for the holiday season looks to be on a par with, if not better than, prerecession levels.
On a recent weekday, the parking area outside the lobby was lined with cars with nameplates such as Lexus, Mercedes and – in a sign that the luxury-car market has undergone its own shake-up – an all-electric Tesla and hybrid-electric Fisker.
Luxury hotels, which were slammed worse during the Great Recession than at any time since the Great Depression, are enjoying a bigger bounceback than the rest of the industry, said Alan X. Reay, chief executive of Atlas Hospitality Group in Irvine. He said hotel profitability in California, measured by revenue per available room, is up by 8.3 percent year to date, outstripping the national pace of 5 percent.
Reay said the AIG effect is old news.
“People are feeling good again,” Reay said. “We have short memories.”