San Diego Hospitality Summit Recap

san-diego-hotel-appraiserIRR San Diego attended Bisnow’s Hospitality Summit, where developers, investors, and even Padres management shared their views on the San Diego Hotel market. Here is a recap of the event.

Trends

The San Diego tourism market is climbing quickly out of the recession, with occupancy rates above 78% according to Joe Terzi of the San Diego Tourism Authority. With such a strong recovery and a forecast of ever-improving market conditions, hotel owners are holding on to their investments, which is leading to a lack of inventory.  Like other property types where money is chasing few deals, it is a difficult time to buy hotels in San Diego (despite the low cost of capital), which is leading some to believe that San Diego hotels may reach the $1 million per room threshold.

Another trend for hotel properties is to buy in Downtown San Diego, one of the hotter submarkets in the area (which is a similar trend for apartment developers and investors that spoke at the last Bisnow summit). While the panelists agree that it is difficult to build downtown (see below for challenges), this consequently creates no oversupply, but rather opportunities for infill projects.

A third trend that developers and investors are seeing is a decrease in family travelers in San Diego. According to one of the panelists, only 25% of overnight guests are those who have children. The emerging group in San Diego are millennials who desire less amenities in their rooms in exchange for project amenities such as restaurants and bars, as well as other amenities such as close public transportation. This trend is a good opportunity for hotel owners, who are able to remove certain FF&E such as desks and arm chairs. This is also leading developers to build smaller rooms.

Opportunities

One of the biggest opportunities discussed during the economic panel is capturing a larger share of international travelers. While San Diego is considered to be a great place for local travel, there is still a large market outside of the U.S. that San Diego is trying to attract. One of the strategies to accomplish this is to improve the flights coming in and out of San Diego International Airport. In comparison, Los Angeles International Airport has 12 million international seats, San Francisco has 7 million, and San Diego has less than 500,000. To attract more international travelers, San Diego is proposing more long haul flights as well as leveraging the Tijuana Cross-border Terminal, which will allow passengers to check-in on the San Diego side of the U.S. – Mexico border and catch their flight at the Tijuana International Airport. This coupled with a marketing budget of tens of millions of dollars will hopefully attract an untapped share of the market.

Another opportunity in San Diego is the local craft beer scene, with panelists calling San Diego the next Napa for beer. Due to craft beer’s increased popularity, San Diego is becoming more of a destination spot for beer lovers. That said, less than 20% of beer consumed in San Diego is craft, which allows room for growth. This is evidenced by local companies like Alesmith and Ballast Point expanding into larger facilities in Miramar.

A third opportunity discussed during the summit is the expansion of the convention center, which Mr. Turzi says is key to sustainable growth for the hotel market. Currently, about 800,000 rooms are associated with the convention center. With the proposed expansion, an additional 300,000 to 400,000 rooms will be added. Although an exact timeline wasn’t provided, Mr. Turzi hopes that an agreement can be made soon regarding the convention center’s future.

Challenges

With little supply and big demand for Downtown San Diego, it is getting more and more difficult to find sites to build hotels due to increased competition (from other hotel developers as well as developers of other property types). The focus on urban areas also leads to difficulty in obtaining entitlements as well as push-back from local neighborhoods who are opposed to infill developments.

Another challenge to the San Diego hotel industry is companies such as airbnb, where everyday people rent rooms or even entire houses to travelers. These types of services add thousands of unaccounted rooms in the San Diego market, and it is becoming a larger force to be reckoned with. With cities like San Francisco trying to find ways to regulate this market, the hotel industry knows that companies like airbnb are not going away anytime soon.

Summary

The San Diego hotel market is continuing to thrive, and the panelists agree that this will continue for the foreseeable future. There are many opportunities to attract visitors to San Diego, and while there are many challenges associated with new construction, existing hotel owners will continue to benefit from lack of supply and pent-up demand.

With a dedicated practice to the valuation of hospitality properties, Integra Realty Resources are experts in the appraisal of hotel properties. If you have any questions about the San Diego hospitality market, or if you are in need of a hotel appraisal, please contact us today at 858.259.4900 or at sandiego@irr.com.

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