Hotel construction in county to remain dry until 2012

The Daily Transcript
Friday, March 20, 2009

By THOR KAMBAN BIBERMAN

Hotel construction in San Diego is “zero” for the next three years, said Robert Rauch, hotel consultant, developer and owner.

He doesn’t expect any full-service hotels more than 200 rooms that aren’t already under way, if there are, to even start construction in the county prior to 2012. “I’m talking zero,” Rauch said.

Not only is there no financing, Rauch said he couldn’t think of a hotel currently under construction in San Diego County.

Rauch, who owns a Hilton Garden Inn and a Homewood Suites in the Sorrento Mesa area, has been a hotel consultant for decades.

The newly completed 1,200-room Hilton next to the Convention Center is the most recent major addition, but nothing of that magnitude is planned until hotels at Lane Field and Pacific Gateway as part of the Broadway Complex come out of the ground in the North Embarcadero area.

Rauch said while San Diego County’s hotel supply has grown at a rate of about 3 percent per year in each of the past two years, he doesn’t expect even smaller hotels to start construction for at least a year and possibly more.

A couple of smaller hotels in the works were mentioned by Rauch.

One is the proposed 130-room Encinitas Beach Resort, what is described by Rauch as being a super-luxury affair by KSL Resorts, manager of the Hotel del Coronado. KSL had originally hoped to start that project last fall, but it hasn’t started yet.

The other is the proposed 250-room LegoLand Hotel at the theme park in Carlsbad.

But that project isn’t expected to come before the California Coastal Commission until early next year.

“The market is going to be soft for three years, and I don’t see any meaningful demand until 2012,” Rauch said, adding demand in the county in the first quarter was down by 14 percent in San Diego County when compared to the like quarter a year earlier. Occupancy is off by as much as 17 percent year-to-year.

“And the average RevPAR (revenue per available room) is down by 20 percent,” Rauch said. “I don’t know of any hotel that is making any money this quarter.”

Hotels of the Hilton’s magnitude, Rauch said, typically take about three years to achieve the plateau known as stabilization.

He couldn’t speak for the Hilton itself, but said such hotels here generally start in the 58 to 60 percent occupancy in the first year, 65 to 70 percent occupancy in the second year and 76 to 78 percent in the third year.

Those numbers could be very difficult to achieve now.

“The primary reason the large hotels won’t start until 2012 is we’re going to 60s (percent) occupancy ranges for a while,” he said.

The good news for the Hilton and its neighbors the Manchester Grand Hyatt and the Marriott Hotel Resort & Marina, is conventions are continuing to be booked.

The not so good news is smaller blocks of rooms are being reserved in the upscale hotels in favor of less expensive lodging.

“Fewer people are willing to pay the full rate anymore,” Rauch said.

San Diego, aside from its superior weather has an advantage over many other areas around the country in that it is a drive-to, as well as a fly-in market, so should recover sooner.

The San Diego Convention & Visitors Bureau reported the number of overnight visitors countywide dropped from about 1.15 million in January 2008 to 1.11 million in January 2009, but the average occupancy rates are much more telling. The county’s average hotel occupancy that was 61.6 percent in January 2008, was down to 53.2 percent in January 2009.

That’s a lower occupancy than a large hotel is expected to accomplish in its first year of operation.

It should be noted here that one month does not a trend make, and these figures are expected to be higher in subsequent months.

The county average daily rate was $134.54 in January 2008 and $123.34 in January 2009.

Here again, given that with an American Automobile Association discount it is still possible to find what most would find to be an acceptable room in Mission Valley for less than $80 a night, these averages too may be somewhat misleading.

Rauch said smaller hotels — such as the Courtyard by Marriott and Residence Inn, and his Homewood Suites and Hilton Garden Inn — will be the beneficiaries of this economizing and should lead the next hotel construction cycle in a couple of years.

“These hotels have very good margins …” Rauch said. “Smaller, focused hotels will get built, but resorts are really struggling.”

With this economy, even the smaller, less- expensive hotels have to slash their rates and boost their offerings if they hope to retain market share.

“It’s a real war out there,” Rauch said.

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