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Room Rates Will Fall in Step With Occupancy Rates, Expert Predicts

While San Diego’s lodging industry has enjoyed a trend of continually increasing room rates during the past couple of years, at least one prominent hotel owner foresees a decline on the horizon.

Jack vanHartesvelt, senior vice president of Seattle-based Kennedy Associates Real Estate Counsel Inc., which owns and is currently renovating the 424-room Hyatt Regency Islandia on Mission Bay, said that occupancy rates, which have been in decline month over month since December, are likely to continue a downward trend, and will soon result in lower room rates.

The decline in occupancy, according to his company’s research , Kennedy Associates specializes in acquiring hotels nationwide for redevelopment into upscale properties , is rooted in businesses opting to use high-technology devices to communicate rather than traveling to make face-to-face contact. The nation’s businesses have been able “to move the dial” on the gross domestic product with less travel, vanHartesvelt said.

“Whether they’re using PDAs (personal digital assistants) or laptops or whatever, it eventually begins to affect hotel room nights,” he said. “That’s what we’re seeing now. In 2006, occupancy was down in three of four quarters nationally, but the gross domestic product is up.” By hotel room nights, vanHartesvelt was referring to the number of rooms a hotel lets nightly , the industry’s yardstick for measuring occupancy rates.


Less Travel Required

“Anecdotally, if a person traveled on business 20 times a year, they may now travel 18 times a year. They realize they can get the same amount of business done without traveling as much. Well that’s not a big decline in the number of trips for each individual, but take that times 50,000 business travelers and it is a big decline.”

The introduction of “real time” video technology on phones could further discourage business travel, he pointed out.

The nationwide trend of decreased occupancy rates runs counter to an increase in GDP, vanHartesvelt said. Traditionally, when the GDP is on the rise, hotel occupancy rates follow suit. But occupancy and room rates tend to correspond, he added.

“As occupancy rates go down, room rates will follow,” he said, explaining that historically they have followed each other in “fishtail” fashion, up or down, within a six- to nine-month time frame.

VanHartesvelt noted that his outlook relates strictly to individual business travel, not to business conferences and conventions or leisure travel.


Plenty Of Room At The Inn

According to Smith Travel Research, a Tennessee-based firm that tracks the hotel industry nationwide, occupancy at hotels in San Diego County dropped 1.3 percent to 54.5 percent in December compared with the like year-ago month. The average daily rate, conversely, was up 6.2 percent.

Smith Travel’s most recent report containing complete statistics shows that occupancy at the county’s inns was down 3.1 percent to 67.8 percent year-to-date through the end of February compared with the same time frame a year earlier. But the average daily room rate was up 7.4 percent.

According to a preliminary weekly report by the Tennessee researcher for the 28 days ending March 31, occupancy was off by 2.9 percent from the same period the year before, while room rates were up by only 3.9 percent.

VanHartesvelt says that the margin of increase in room rates during March, which declined from months past, validates his point.


A Different Perspective

Bob Rauch, a professor at San Diego State University’s Hospitality and Tourism Management Program, doesn’t agree that room rates are heading south, at least not now.

Rauch, who is also a co-owner of the 120-room Homewood Suites by Hilton San Diego-Del Mar, said that although he has seen more leisure travelers and fewer business travelers recently, he attributed it to spring break rather than an overall decline in business travel.

“But I do see some softening in the commercial technology sector,” he added. “We’re watching it, but I do not believe it will continue. I’m still bullish on 2007, and I’m not changing my forecast at this time.”

Rauch earlier predicted that room rates would grow by 6 percent to 7 percent this year.

Though only two hotels opened in the county with a total of 129 rooms last year, there are 3,770 currently rooms under construction, including the 1,190-room Hilton San Diego Convention Center Hotel in downtown, and 13,390 rooms in the planning stage, according to Atlas Hospitality Group, an Irvine-based hotel brokerage that tracks hotel starts and sales throughout the state. Ordinarily, only 10 percent of rooms in the planning stage actually get built.

Looking further into the future, Rauch said he thinks the growth in room rates countywide would slow in 2008 and would be flat in 2009.

“Occupancy is high in general, so room rates will be fine,” he said.

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