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Hotel Construction on Pace to Set Record in 2018

The Daily Transcript
07/24/18

Hotel Construction on Pace to Set Record in 2018
By Thor Kamban Biberman

Hotel construction in California continued at a very strong pace through the first half of 2018, compared to a year ago — a condition expected to continue as long as the economy holds up.

“2017 was a record-breaking year for California hotel development, and as we predicted, 2018 is on pace to eclipse it,” said Alan Reay, president of Atlas Hospitality Group.

Twenty-six hotels opened in the first half of both 2017 and 2018, while other metrics went up substantially between the two years.

The number of hotels under construction increased 41 percent to 183, and the number of new rooms under construction went up 42 percent to 25,872 in 2018.

The number of planned new hotels and rooms in the state increased by 24 percent and 20 percent, respectively. There were 959 California hotels in the planning stages midway through 2018, versus 773 last year. Rooms in planning went from 113,973 to 136,706.

San Diego County added four hotels and 627 rooms in the first half of this year. The largest was the 250-room Legoland Castle Hotel in Carlsbad. The others were the 159-room Willows Hotel & Spa in Alpine; the 120-room Marriott Courtyard in El Cajon; and the 98-room TownePlace Suites in downtown San Diego.

There are 21 hotels with a total of 3,410 rooms currently under construction in San Diego County. The largest continues to be the 400-room InterContinental downtown that is slated to be completed in September, according to The CoStar Group.

The InterContinental is being developed by Portman Holdings, which was also part of the team that developed the Hilton San Diego Bayfront.

A 239-room Carte Hotel & Suites, which is being developed by Pierpoint Management at 401 West Ash, is reportedly on track for a fall opening.

In North County, Grand Pacific Carlsbad Hotel is putting the finishing touches on a 283-room Westin Carlsbad Resort & Spa. The CoStar Group reports that project should be completed in September.

The number of planned hotels in San Diego County was up 11 percent in the first half of this year to 84 and the number of planned rooms rose 13 percent to 17,080.

Proposed hotels include approximately 1,575 rooms in the hospitality portion of the Manchester Pacific Gateway development downtown.

Gaylord Bayfront Chula Vista is scheduled to have 1,600 hotel rooms; approximately 1,100 rooms are proposed for Harbor Island; and a project behind the Convention Center, dubbed Fifth Avenue Landing, could have 831 rooms if a measure to expand the Convention Center doesn’t pass.

Another downtown project facing challenges is a planned Ritz Carlton-branded venue at Seventh and Market. It that would include 160 rooms along with what CoStar referred to as 58 Ritz Carlton-branded condominiums, office space, apartments, and retail. The project is tied up in litigation, however.

While not every hotel will be built, lenders and developers continue to be very bullish on new California hotel construction, as they see a very positive long-term outlook for the Golden State.

A report by the Atlas Hospitality Group found that despite a 20-25 percent rise in construction costs during the last 12 months, the pace of new hotel construction has not been dampened.

Reay, the Atlas president, said “hotel owners are enjoying some of the best profit margins they have seen in a long time, despite rising cost of labor.”

“California hotel values continue to climb, which helps offset the increased cost of construction,” the Atlas report stated. “Midway through 2018, all signs continue to be positive.”

Reay said mid-scale limited service business hotels are most popular these days.

“Marriott and Hilton brands are examples,” he said.

Although much has been written about Airbnb cutting into hotel’s bottom lines, Reay downplayed the impact.

“For business travelers, we are not seeing a big effect,” he said. “It seems to have more impact in resort-type areas, but overall ADR (average daily rates) and occupancies in California are up and have been in a positive territory for the last eight years.

“A number of people have been predicting a slow-down but we are not seeing any signs of it, so hotel developers and lenders are continuing to move forward with projects.”

Reay conceded that if there is a slowdown — or worse, a recession — there will be a problem in the industry.

“Yes there will,” he said. “If we have a slowdown and/or a decline in room revenues, that will have a big impact.”

In the meantime, Reay said revenue per available room figures have been on the rise for the past eight years.

It often isn’t easy to build, particularly in certain locations.

“Coastal areas are the most challenging due to Coastal Commission restrictions, and local opposition,” Reay said.

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