Silicon Valley Business Journal
06/14/17

Hotel Development Boom Hits San Jose
By Olivia Schaber

http://www.bizjournals.com/sanjose/news/2017/06/14/hotel-development-boom-hits-san-jose.html

Amid a boom in convention business, an influx of new hotels is headed to downtown San Jose. The upswing follows a five-year lull, between 2009 and 2014, that brought virtually no new hospitality development to the city.

Two new hotels have opened this year — the 210-room AC Hotel and the 44-room Hotel Clariana— in downtown San Jose.

Three more are on the horizon: The 279-room Tribute Hote adjacent to the Four Points by Sheraton (historically the Hotel Montgomery), the Homewood Suites by Hilton north of the South Bay Freeway (CA-237) and a 173-room Kimpton Hotel in Museum Place are all set to open in the next five years.

Among the biggest drivers for the development boom are the large crowds drawn from events held at the San Jose McEnery Convention Center and SAP Center. Both Apple and Facebook held their global developer conferences in San Jose this year, after previously hosting them in San Francisco.

“You would be hard pressed to find another market in California that is dynamic as San Jose — it has a very diverse mix of demand generators,” said Alan Reay, president of Irvine-based Atlas Hospitality Group, a brokerage firm that specializes in California hotel property sales.

Hotel Clariana, which opened just before Apple’s Worldwide Developer Conference last week, was almost fully booked in its first few weeks of being open. Its developers are already planning a 60-room expansion onto its parking lot on South Third Street.

“Demand for hotels is so big, competition isn’t a problem — that’s why we’re going with the expansion,” said Henry Phan, Hotel Clariana’s general manager.

Another positive sign for hotel developers is tech giant Google’s recently announced plans for a massive campus in the Diridon Station area that could bring up to 20,000 jobs with it.

John Sevilla, general manager of the AC Hotel, said the hotel is excited for potential partnerships with Google, especially since it is the closest hotel to Diridon Station.

The AC Hotel is one of the U.S. locations of Marriott’s European chain and so far the only one in the Bay Area. Another AC Hotel is opening near San Francisco International Airport in July.

Reay, of Atlas Hospitality Group, said the San Jose hotel market has topped its 2007 peak and continues to climb. Along with San Jose’s rapid growth, the city is currently crunched for hotel room inventory after the five-year development hiatus — creating a perfect environment for new hotel developers.

Reay said hospitality markets typically see annual growth of 2 percent to 3 percent, and the recent construction boom is making up for the downturn, when hotel values plummeted and room and occupancy rates dropped.

“There was no construction financing at that time — lenders were offloading foreclosed hotels, not making new loans,” he said. “Now, we’re seeing it across the board in California markets where hotels are selling above replacement costs.”

San Jose’s hotel occupancy rates rose from 68.6 percent in 2013 to 77.7 percent in 2016. At the same time, average room rates soared 40.9 percent from $145.98 in 2013 to $205.69 in 2016.

“The city is running at historically high occupancy rates right now,” Reay said. “They will try to maintain those occupancy rates and they will become more aggressive about pushing rates. Hotels will be extremely profitable, but for travelers and commercial businessman it will become a lot more expensive.”

Still, as with every market, there is a saturation point, and developers have to be careful not to miss the boom.

“Developers as well as lenders have to be a little bit careful about how many new rooms are on the books and how many new hotels come into the marketplace,” Reay said. “Developers will be more cognizant of which locations they go into in San Jose and more importantly which brand is available.”

Reay said popular brands like Marriott and Hilton already have a presence in the city, narrowing the choices developers have for opening new hotel brands in San Jose.

Currently prominent in the downtown area are brands like the Hyatt Place, Westin, Hilton San Jose and San Jose Marriott.

The Fairmont, located on South Market Street, is a popular destination for high-profile individuals: President Obama stayed there earlier this year during a Silicon Valley stop.

The presence of many of the big-name hotel brands may be why a spate of “boutique” hotels are cropping up in San Jose, including Hotel Clarion and the AC Hotel. The Hotel De Anza has been a downtown staple.

The Hotel De Anza, which opened in 1931 and is famous for its live jazz music, has felt the effects of new development in San Jose over the years. General Manager Martin Hoellrigl said “the more product added to a market the more demand will diminish” — meaning there is a potential for the average room rate to decline once the new hotels open, which is great for visitors but not so great for the hotels themselves.

Still, Hoellrigl is optimistic about San Jose’s growth, and said demand for hotel rooms will continue to grow as more people travel to the city, especially for business and events.