Big hotel under construction to lure more business to San Diego: county leading California with some 3,000 rooms

San Diego Business Journal, July 24, 2006 by Connie Lewis

Building cranes and hard-hat crews are fast at work completing construction on a slew of hotels in Southern California, and San Diego County is apparently seeing the greatest amount of activity.

In the first half of the year, seven hotels were under construction in the county with a total of 2,685 rooms--the highest in the state, according to Atlas Hospitality Group's Mid-Year Hotel Development Survey.

The 1,190-room Hilton San Diego Convention Center Hotel also tops the list of the largest hotels being built.

During the like year-ago period, the county counted three properties with 468 rooms under construction.

Altogether, 9,437 hotel rooms are planned for construction throughout the county. But it's hard to determine how many will actually get built. Historically, the average has been about 10 percent.

Aside from the new Hilton, the properties in various stages of completion include the 420-room Hard Rock Hotel and the 334-room Renaissance Hotel, both in the Gaslamp Quarter; the 261-room Grand Resort Del Mar and 39 adjacent fractional-ownership villas; the 19.1-room Diegan in downtown; and the 250-room expansion of the Hotel del Coronado.

Tale of two regions

The midyear report, published last week, points out the striking difference between Southern California, where hotel development is hot, and Northern California, where it is anything but.

Among San Diego, Los Angeles, Orange, Riverside, San Bernardino and Ventura counties, Southern California saw a huge bump in the number of hotel rooms--7,970 rooms compared with 4,744--under construction. Conversely, hotel building in Northern California dropped 69 percent from 14,088 rooms to 4,391, comparing the first half of 2006 with that of 2005.

"It's sort of a tale of two areas," said Alan Reay, who heads the Costa Mesa-based Atlas Hospitality Group, a hotel brokerage. "Southern California's healthy increase in hotel development mirrors how strong the hotel market is there versus Northern California."

According to the report, Los Angeles County had 1,336 rooms under construction; Orange County had 975; Riverside County logged 898; Ventura County counted 697; and San Bernardino County had 576 rooms.

Reay predicted that the building picture for Northern California would improve within the next two years, however, since revenue from room rentals there is on the upswing.

Meanwhile, San Diego's hotel owners and operators, particularly those in downtown, are concerned about whether the increase in room inventory will lower occupancy rates at their individual properties.

No worries

Yet Reay thinks their fears are unfounded.

"I think San Diego is a very unique market that I liken to Las Vegas where you have mega casinos and resorts opening up," he said. "One might think that there would be a drop in occupancy but (then) a couple of things happen.

"New businesses move in, and the new hotels that open up breed excitement, draw a lot of entertainment, and a lot of buzz."

Should occupancy rates slide, however, Reay expects the dip would be minimal and that hoteliers' ability to continue increasing their room rates would make up for the difference.

Joseph Kruvi, Hilton Hotels' vice president for Southern California, disagrees that San Diego compares to Las Vegas; he thinks it will take more than buzz to fill local inns.

The Las Vegas tourism industry is a juggernaut, fueled by a $199 million marketing budget, whereas the San Diego Convention & Visitors Bureau--the city's tourism marketing arm--has seen a 37 percent decline in city funding to $8.8 million in recent years, Its total budget amounts to $12.3 million.

TID support

Kruvi said he supports a proposal for a tourism improvement district being floated that would impose a 2 percent fee on hotel room rentals within the city and raise as much as $24 million annually.

But from the sound of it, Hilton's marketers are having no trouble luring future meetings and events for the new convention center hotel. Builders have yet to complete the first floor, and the opening is more than two years off. But already it has more than $10 million worth of business on the books, he said.

The hotel, which secured financing in January, had been on the drawing boards since 2003. Yet it was considered the missing piece of the puzzle needed to increase business at the 2.6 million-square-foot downtown convention center, since it would allow more events to be scheduled simultaneously. The center, which opened in 1989, doubled in size in 2001.

"We have booked groups from December 2008 through 2014," Kruvi said. "That's where the window of opportunity is."