CoStar
12/13/17

San Diego Remains Hotbed for Hotel Development
By Lou Hirsh

http://www.costar.com/News/Article/San-Diego-Remains-Hotbed-for-Hotel-Development/196580

For 2018 and likely beyond, experts are expecting San Diego County to remain among California’s hottest spots for new hotel development.

That’s thanks in part to a continued strong influx of tourists, conventioneers and business travelers into a market that has generally avoided glut conditions for many types of commercial properties, via a perennially modest pace of new construction relative to demand.

Preliminary data from brokerage and research firm Atlas Hospitality Group indicates the San Diego region, as of early December, had 18 hotels under construction, with a total of 3,140 rooms. Within California, those numbers are second only to Los Angeles County, where 32 hotels totaling 5,379 rooms are currently under construction.

“San Diego is actually the most active for development of new rooms as a percentage of the total current inventory of rooms in the market,” Atlas President Alan Reay told CoStar News.

While it remains to be seen when they will get built, San Diego County has another 79 hotels in various stages of planning, representing 15,574 rooms. Atlas reported earlier this year that the region’s hotels and rooms in planning are both up 31 from a year ago, reflecting a bullish outlook among developers about the region’s hotel fundamentals.

Reay said downtown San Diego is very similar to downtown Los Angeles, in that both have recently seen a surge in new hotel construction to meet pent-up demand, after a period of nearly seven years of relatively little new hotel development in the central business district.

Downtown San Diego accounts for about a third of the new rooms currently under construction in San Diego County. The largest underway is a waterfront-adjacent, 400-room InterContinental Hotel, which recently had its construction topping-out and is slated to open in September 2018.

The $217 million hotel will employ more than 300 and is being developed by a team that includes Robert Lankford, Hensel Phelps and Portman Holdings. It will be the first San Diego location of Intercontinental Hotels Group’s (IHG) luxury brand to be built in 30 years; downtown’s first InterContinental was rebranded in the late 1980s into what is now a Marriott Marquis.

The InterContinental site is next-door to a $130 million, dual-branded Marriott complex – with a 253-room SpringHill Suites and a 147-room Residence Inn – that opened last year and was built by the same development team, on a site that formerly housed the Lane Field minor league baseball park.

San Diego developer Lankford said the newest high-end hotel had been in various planning stages since 2004, but awaited the right combination of approvals and economic conditions to come to fruition.

“It’s pretty complicated to get something like this done, but it starts with a vision,” said Lewis Fader, senior vice president of operations at IHG, which recently opened an 889-room InterContinental in downtown Los Angeles.

Other hotels currently under construction in downtown San Diego, all set for openings in 2018 or early 2019, include a 239-room Carte Hotel, a 168-room Guild Hotel, a 126-room location of Marriott’s budget-chic Moxy and a 98-room TownePlace Suites, also a Marriott brand.

Robert Rauch, president and CEO of hotel management and consulting firm RAR Hospitality Inc. in San Diego said the region’s current post-recession tourism recovery, spanning nearly seven years, still has room to run and will continue to fuel hotel room demand.

In downtown particularly, he said demand should keep hotels filled across multiple pricing points during 2018 and likely beyond that. The San Diego region surpassed the 2007 pre-recession peak for average hotel room rates during 2015, and rates have since continued to rise at a pace surpassing national figures.

Even if downtown convention business dips slightly in 2018 from robust levels seen during 2017, which many observers are anticipating, Rauch said the number of new rooms coming online is likely to keep occupancy rates on par with 2017 while room prices continue to rise.

“You could see room rate growth of 3 percent or 4 percent,” Rauch told CoStar News.

Experts said local land prices and related costs tend to favor high-end hotel development in order for projects to pencil-out financially. However, not all of the upcoming new San Diego hotels will be on the pricey side.

At a recent development forum presented by the San Diego chapter of Commercial Real Estate Women, local developer Yehudi Gaffen said at least two of the four hotels planned for an upcoming $1.5 billion, mixed-use redevelopment of downtown’s Central Embarcadero waterfront district will be budget-oriented.

Gaffen, who is part of a team known as Protea Waterfront Development, said the approximately 1,000 hotel rooms in the project will include about 350 “micro-rooms” and a 225-room, 475-bed hostel property, with offerings familiar to travelers in regions such as Europe.

The micro-rooms, similar to cruise ship cabins, would measure around 150 square feet and rent for around $150 per night. The gender-separated hostel beds, with access to various common spaces, could be priced as low as $50 per night.

Those budget-leaning offerings are expected to be built alongside a planned full-service, four-star hotel with around 500 rooms and a five-star, high-end boutique hotel with about 50 rooms. Branding hasn’t been finalized, but plans call for one of the higher-end properties to be a Virgin Hotel, and for the micro-room hotel to be a Yotel property.

The waterfront project, also slated to include retail, a museum, aquarium and spire-shaped observation tower on the current site of Seaport Village, is currently undergoing port district approvals, and eventually will require the blessing of the California Coastal Commission. Gaffen noted that the hotel component planning stems in part from recently stated priorities of the coastal commission to boost the state’s offerings of affordable waterfront hotel accommodations.