San Diego market expected to flourish—with caution

SAN DIEGO—With expected increases in RevPAR in the near future, the market here is expected to continue to show growth, a good sign for hotel brands and developers in the area. Despite a market boom, hospitality leaders will face several challenges in the region in the upcoming year, including a more cautious attitude toward lending.

Six hotels totaling 1,017 rooms opened here during the first half of 2016, according to a mid-year report released by Atlas Hospitality Group. The dual-branded 253-room SpringHill Suites and 147-room Residence Inn San Diego Downtown/Bayfront was the largest to open. Under construction are four hotels with 957 rooms. The largest property now in progress is the 400-room InterContinental San Diego Lane Field, which is located in downtown San Diego. There are 52 hotels and 10,349 rooms in planning.

“Branded and boutique hotels are part of the urban mix, including dual-branded properties along Pacific Coast Highway, the luxury 317-room Pendry Hotel and the recently announced first Ritz Carlton for San Diego in East Village,” said Robert A. Rauch, president and CEO of RAR Hospitality, a San Diego-based hotel management and consulting company, in his recent blog post for

Hotels in the area are forecast to see a RevPAR increase of 2.2% by year-end 2016. This growth, primarily due to an estimated decline in occupancy of 0.1% and a 2.2% gain in ADR, is less than the national projection of a 3.6% increase in RevPAR, according to the latest Hotel Horizons report published by CBRE Hotels.

“Decline in occupancy is due to absorption of new supply with demand growing more slowly than supply,” said Bruce Baltin, managing director at CBRE.

The market is projected to witness a supply increase of 1.5% by the end of the year. Demand is expected to see a boost of 1.4%. “The new supply is all in the upper-priced segment, which is why lower-priced RevPAR is growing more quickly in 2016,” he said.

CBRE estimated a 3.0% increase in supply for upper-priced hotels by year-end (compared to a decrease of 0.4% in supply in the lower-priced market segment). The San Diego market has a total room supply of 61,280, according to the report.

RevPAR in the upper-priced segment is forecast for a 0.2% increase by the end of 2016 (compared to a 5.3% gain in the lower-priced hotel market during the same time period).

“As the supply gets absorbed in 2017, the upper-priced segment is expected to rebound in RevPAR growth,” Baltin said.

The luxury 317-room Pendry Hotel

The upper-priced hotel market is expected to see a RevPAR increase of 6.0% by year-end 2017. Some of the top brands by rooms in this segment include: Hilton, Marriott, Courtyard, Residence Inn and Sheraton.

The lower-priced segment is forecast to witness a RevPAR gain of 5.0%. Motel 6, Best Western, Best Western Plus, Days Inn and La Quinta Inns & Suites topped the list.

San Diego RevPAR overall is expected to increase 5.9% in 2017. ADR is expected to grow 5.3% and occupancy is forecast to slightly grow 0.6% during the same year.

“California and especially San Diego continue to see healthy increases in RevPAR and profitability, but some are concerned about the number of new rooms being added to the supply and if we can absorb all of it,” said Alan X. Reay, president of Atlas Hospitality Group. “I think we can.”

Supply in the San Diego market is expected to increase by 1.8% by year-end 2017; demand, on the other hand, is projected to jump 2.4%.

One potential reason as to why the San Diego market is thriving is the increase in travel, especially domestically. “San Diego has a strong vacation reputation and the city is seeing quite a few visitors with record occupancy and rate,” Rauch told Hotel Business in an interview. “Even for those who live in Orange County (less than an hour drive), the city of San Diego is seen as a vacation destination because of its beautiful beaches, relaxed downtown, professional sports teams and theme parks.”

A rendering of the Ritz Carlton for San Diego in East Village

The influx of international travelers may also be contributing to San Diego’s recent boom. “As Chinese travelers are making their second and third trips to the U.S., they are going to the destinations just beyond the gateway cities. San Diego is at the top of that list due to its accessibility from Los Angeles and top-tier offerings,” he said.

While the San Diego market is flourishing, challenges still lie ahead—some of which are directly tied to a slow-moving bureaucracy. “The city cannot afford to have every new development get caught in years of red tape,” Rauch noted. “Innovation moves faster.”

Many experts believe finding capital may be another issue for developers in the region, a result of banks remaining hesitant. “Banks are being cautious as to not get caught with oversupply in another recession,” he said. “This is helping the industry stay level-headed through the course of development and not overbuild.”

“On the hotel development and sales side the challenges we are facing is that lenders are starting to pull back from the hotel market and being a lot more conservative, which is creating some pressure on prices,” Reay said.

Other counties in the state are also apparently impacting San Diego county, too. “The city continues to be a very strong hotel market, but its challenges are the amount of regional demand it gets and the growth that’s occurring in Los Angeles and Orange Counties in terms of new amenities and tourist attractions,” Baltin said.

As far as the future of the San Diego Market is concerned, many experts are hopeful, pointing to the potential increase of international travelers and additional downtown offerings. “No matter what happens, I don’t see growth in the city going away,” Rauch said, speaking on the upcoming year. “It is an affordable and beautiful vacation destination.”

There should also be a keen focus on the industry’s favorite—and most talked about—age group: millennials. “The market should obviously continue to pay attention to e-commerce and marketing to millennials,” Baltin added.  HB

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