|Hotel Indigo Gaslamp San Diego
SAN DIEGO—Judging by the sheer volume of hotel transactions in San Diego in 2011 alone—nearly US$1.5 billion in hotel deals closed in six months—it appears investors are more confident betting on the city’s future. Add in nearly 9,000 rooms to the existing pipeline, and it’s clear the San Diego market is hot and will only be getting hotter.
“In the 25 years I’ve been in the hotel business, I don’t think I’ve seen that much volume—even during the peak volume times—in such a short space,” said Alan Reay, president of Atlas Hospitality Group, which has tracked 18 deals so far this year.
And, according to pipeline reports, STR says there are 8,789 rooms in the in construction, final planning and planning phases in the San Diego market while HVS Global Hospitality Services says there are 3,000 rooms in the downtown San Diego pipeline and 1,500 of them have already been approved and are seeking finance.
An evolving market
San Diego’s hotel market hit bottom in 2009, when occupancy fell 9.2% to 62.8%, average daily rate fell 12.5% to US$124.87 and revenue per available room fell 20.5% to US$78.42, according to data from STR, parent company of HotelNewsNow.com. Occupancy and RevPAR have been on a steady-but-slow climb since then, but without much commercial business, hoteliers are still struggling with raising rates. From January to May 2011, average monthly occupancy was reported at 65.9%, ADR at US$121.11 and RevPAR at US$79.82.
“I think we are finally seeing the recovery come. I don’t think it’s as quick as a lot of people had hoped, but we are seeing a lot of the short-term corporate business coming back, as well as the leisure business,” said Ray Warren, GM of the San Diego Marriott Marquis & Marina, owned by Host Hotels & Resorts and midway through a four-year, US$200-million full-property renovation. “We’ll do over 1,100 rooms a night this weekend (1-3 July)—mostly leisure business. The demand is coming back.”
Along with the hotel performance-metrics recovery happening around the world, San Diego is experiencing growth from different demand generators. At one point in the 1990s, San Diego was heavily dependent on one industry—national defense. Now the market is gaining momentum in the convention business arena and is attracting more leisure business with the creation of the Gaslamp District and the addition of San Diego Padres’ Petco Park. A planned expansion of San Diego’s convention center will happen in the near future, and a US$20-million beautification from the Lane Field site to one mile north on North Harbor is expected to bring an additional 400,000 roomnights per year, according to HVS.
“It’s a good time for investors to think about that,” said Jaime Law, assistant VP with HVS. “San Diego has been a pretty good market in the past 10 years. In 2010, occupancy was back to the low- to mid-70s and rate began to trickle back. It’s an attractive market for all those reasons.”
2011 San Diego County hotel sales
|Manchester Grand Hyatt
|Westin Gaslamp Quarter
|Hyatt Summerfield Suites
|Residence Inn Mission Valley
|Se San Diego
|Courtyard Old Town
|Doubletree Golf Resort
|Motel 6 Escondido
|Holiday Inn Express Old Town
|Holiday Inn Express Mission Bay
|Park Manor Suites
|Howard Johnson Express El Cajon
|Ramada Limited SeaWorld
|Sea Coast Palms Inn
|Bay Cities Motel Chula Vista
|Source: Atlas Hospitality Group
“Where else do you get the weather, an airport that’s 10 minutes from the hub of the city, a set of quality hotels and great restaurants and bars?” Warren said.
However, Law said San Diego is missing one critical piece of demand: commercial business. And he can’t seem to understand why San Diego can’t get it right.
“I believe this market just doesn’t have a core commercial base,” Law said. “The commercial business that exists is law firms that have to deal with the jailhouse and some military-related business, so that’s low-rate type of business.
“Carlsbad (California) has biotech and high-tech demand that can pay higher rates,” he continued. “Why does the demand not exist in San Diego? One of the reasons is because they have a jailhouse in the city. You’re not getting a headquarters to move (downtown) because that area is not the best area. No wonder the Se San Diego (a 184-room property that sold in May for US$49 million) is doing poorly; it’s just not the best area.”
Hot transactions market
As San Diego, the eighth-largest city in the U.S., became one of the country’s hottest hotel markets in 2006 and 2007, many of the city’s hotels were traded or financed at that time. Now those loans are coming due.
“In 2006 and 2007 banks were very lax with their underwriting. They were very aggressive in (commercial mortgage-backed securities) debt written on extremely high values, and they were being underwritten on performance,” Reay said. “So what that really led us to was a lot of properties that had way too much debt on them.”
Buyers with easy access to capital today, specifically real-estate investment trusts, are perched on the sidelines.
“Owners with experience saw how bad the downturn was and never thought they could get the kind of prices they are today,” Reay said. “There’s definitely more motivation to sell in San Diego because they went through a really bad bruising.”
For example, one of the first Hotel Indigos, developed and owned by InterContinental Hotels Group to showcase the new brand on the West Coast in 2009, is in the process of being purchased by Chesapeake Lodging Trust for US$55.5 million. It was never brought to market.
“The transaction came together through a relationship,” said Jim Anhut, chief development officer for IHG in the Americas. “The hotel was not widely brokered, and it was not intended to be.”
There is a lot of appeal in San Diego because of basic fundamentals and demand exceeding supply, Anhut said. Savvy investors take note.
“They’re looking three to five to 10 years out, and it’s a good time to buy because they’re looking at trailing-12 numbers,” he said. “They see it as a prudent and savvy time to invest; we can recycle that capital into other assets.”
IHG signed a long-term contract and continues to manage the hotel.
New supply coming
There are 3,000 roomnights in San Diego’s pipeline, Law said, citing his research.
He noted the developer of the Renaissance San Diego Gaslamp Quarter (362 rooms) has been approved and is seeking financing. It should be built within the next year or so at Fifth Avenue and J Street in the Gaslamp District, he said. A Courtyard by Marriott adjacent to Kimpton’s Hotel Solamar is already under construction. A 330-room dual-branded hotel is planned in Cortez Hill, east of San Diego; and a Mexican developer is planning a mixed-use development called One America Plaza, he said.
“Putting all this in context, and if financing goes through, San Diego will see another 1,400 rooms in three to four years,” Law said. “I just see this market has been very good at absorbing all of this supply and it has a solid base of leisure travelers.”
At the newly branded Marriott Marquis, with 1,360 rooms on land and another 450 docked at an adjacent marina, Host has made its largest investment into one hotel, Warren said.
“It’s pretty hard not to put money into a short bet on San Diego,” he said.