Times will be great during 2008
Happy New Year to all! Yes, tightening credit conditions are expected to make times more difficult for small business entrepreneurs and home equity loans will continue to be troubled as the housing recession might continue into 2009. The current credit crunch, which began in August of 2007 with sub-prime mortgages, will continue to impact the economy well into 2008. The increasing price of gasoline will be of concern to businesses in 2008. With prices now hitting $100 a barrel and almost $3.50 a gallon, proximity to attractions and demand generators will be of increasing importance for hotels. But it is not all bad news!
Since 2008 is an election year, we are likely to avert a recession at least for the moment and perhaps move to a new mantra, “times will be fine until 2009.” According to Smith Travel Research, the lodging industry boasted 26.7 billion in profits in 2006. We have passed the peak of this strong hotel market. Near the end of 2007, U.S. lodging occupancy is expected to decline slightly to 63.3 percent with average daily room rates (ADR) also slowing in growth to approximately $103.38 nationwide, according to PwC. Most lodging industry analysts expect modest drops in occupancy levels due to more new supply than demand but expect average room rates to continue to grow by five percent in 2008.
Perhaps the number one threat to the health of the lodging industry is new supply in the market. While demand is expected to increase in 2008, supply is growing at a much more rapid rate nationwide, approximately 3.5 percent. According to Mark Woodworth, Senior VP of PKF Research, “the economy is softening, there are fewer people traveling and there are more new rooms coming into the market. Hotel construction activity is picking up and will cause a modest imbalance between supply and demand.”
The Travel Industry Association expects travel spending to increase 5.2 percent in 2008 in spite of the declining growth rate of leisure travel. Growth rates of business travel are also expected to level off, according to UBS. The value of the U.S. dollar remains low and long-term interest rates are expected to rise. According to economic forecaster, Harry S. Dent, “we’re going to see more inflation in the second half of 2008.”
A Look at San Diego
In San Diego, local stock prices increased modestly at .44 percent, however the remaining economic indicators for San Diego, including building permits, initial claims for unemployment insurance, consumer confidence, help wanted advertising, and the outlook for the national economy all fell in October of 2007, according to Burnham-Moores, Center for Real Estate, University of San Diego.
According to the San Diego Convention and Visitors Bureau (ConVis), 31.4 million people visited the county in 2007 down 2.1 percent from 2006. These visitors spent an estimated $7.8 billion. By year end, occupancy rates in San Diego will fall to 72.5 percent and ADR will have increased by 6 percent. In 2008, occupancy is estimated to decrease slightly to 71.5 percent however San Diego room rates are expected to increase by five percent to $144.41, according to ConVis.
The leisure travel market, San Diego’s largest travel sector, will greatly contribute to the city’s economy as special events and theme park additions continue to spark interest in visitors. ConVis also estimates that San Diego will attract 32 million visitors in 2008. These visitors will spend approximately $8.1 billion throughout the county.
The U.S. Open golf tournament will be hosted at Torrey Pines in June and both SeaWorld and LEGOLAND will expand with new exhibits in 2008. In the second week of June, the confluence of the U.S. Open, Del Mar Fairgrounds and strong local leisure demand will create significant lodging compression out from Del Mar to the entire cities of San Diego, Solana Beach, Encinitas, Carlsbad and Oceanside.
Almost 2,000 new rooms will enter the market in late 2007 and on through mid- 2008. These include the opening of the Hard Rock Hotel with 393 rooms, The Diegan in March 2008, 185 rooms, the Homewood Suites, which opened in September of 2007, and the Courtyard by Marriott, 200 and 150 rooms respectively at Liberty Station/Point Loma, the Hilton Garden Inn San Diego/Del Mar with 80 rooms in February, The Grand Del Mar Resort & Spa, 261 rooms, the Sheraton Grande in Carlsbad, 250 rooms, the Hampton Inn and Homewood Suites, both set to open in Carlsbad in January, 2008 with 94 and 145 rooms respectively, and the Hampton Inn & Suites in Poway with 111 rooms in March of this year.
The 1,869 rooms flooding the market represent only half of the planned room additions to San Diego. Perhaps the most significant of these additions is the expansion of the SD Hilton Convention Center. This 1190 room property will open in late 2008. This three percent increase in supply will cause occupancy rates to drop by two full percentage points unless major demand increases occur.
Tourism Marketing District
The best answer to increasing supply in San Diego is the Tourism Marketing District (TMD). In its first twelve months of operation, the TMD is expected to generate nearly $30 million and will be a dominant force in maintaining elevated occupancy rates. As the supply of hotel rooms increases over the next few years in the City of San Diego, the TMD provides a strong solution by helping to increase demand.
The TMD is designed to increase hotel room night consumption and enhance tourism activity in the City of San Diego through improved destination marketing efforts. Lodging businesses with 70 or more sleeping rooms will contribute an annual 2 percent of gross room revenue. Marketing programs designed to increase tourism and promote San Diego as a tourist, meeting, convention and special event destination will be funded by the revenue generated.
The TMD began operations January 1, 2008 and will be in effect for five years at which time the district may be extended for an additional ten years. Funds will be allocated to the San Diego Tourism Promotion Corporation (SDTPC) to implement proposed marketing programs. SDTPC will not serve as the marketing force but rather as the channel for development of effective marketing techniques.
This major enhancement, created by tourism industry leaders from both the San Diego Lodging Industry Association and San Diego County Hotel Motel Association will help to keep occupancy levels at or above the current 70 percent plus range. By investing more than 15 million incremental dollars into San Diego’s tourism industry marketing, we should be able to increase room demand by more than two percent, making up for some of the imbalance between current supply and demand. To a great 2008!