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San Diego
Wednesday, May 22, 2024
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Subprime Lending Woes May Halt Some Projects Despite Boom

For the first half of this year, San Diego County’s lodging industry holds the distinction of having more rooms under construction and more in the pipeline than anywhere else in the state.

According to a report of hotel starts and planning by Atlas Hospitality Group, there were 3,944 rooms in 14 hotels under construction in the county, including the 1,099-room Hilton San Diego Convention Center and the 420-room Hard Rock Hotel San Diego, in the first half of the year , a 31 percent hike from the same time frame last year. The Hilton is scheduled to open in late 2008 and the Hard Rock plans to open in the fall.

Meanwhile, there were 12,643 hotel rooms in the county’s pipeline at the end of June, up 34 percent from 9,437 in planning stages during the first half of last year.

Los Angeles County ranked behind San Diego with 16 hotels totaling 2,400 rooms under construction and 9,121 rooms in the planning stages.

Unlike the local housing market, which is down in both sales and starts, San Diego’s lodging market is booming, particularly in the realm of development.

But the brakes could soon be applied if the effects of the fallout in subprime lending, which have spilled over into the lodging market, continue, industry sources say.

“Six weeks ago I would have said that although 10 percent to 15 percent of hotel projects in the planning stage ever actually get built in California, the strength of San Diego’s hotel industry raises that to 20 percent to 25 percent,” said Alan Reay, who owns Irvine-based Atlas Hospitality. “Now, based on the uncertainty in the lending market, lenders are holding back, and if the situation lasts more than a few months, San Diego will be in the 10 percent to 15 percent range.”

Michael Gallegos, president and chief executive officer of San Diego’s largest hotel company, American Property Management Corp., with 45 hotels in the United States and Mexico, agrees.

“We currently have several acquisitions teed up and our lenders are honoring their commitments,” Gallegos said.

At the end of July, APMC said it expected to close on five hotel purchases in Palm Springs, St. Louis, a town in Connecticut and two cities in Mexico. However, Gallegos said last week that the terms on some of the purchases have changed.

“Instead of 75 percent loan to value, we’ll get a 65 percent loan to value and then their interest rate has risen,” Gallegos added. “Nevertheless, we’re pleased they’re honoring their commitment to lend, because now less than 20 percent (of lenders) are still active, 80 percent have dropped out.”

Reay said that borrowing costs for hotel transactions in the last four weeks have jumped 20 percent to 25 percent.

“If we were getting 6 percent to 6.5 percent before and the spreads have increased by 1 percent to 1.5 percent, loans are currently being quoted at 7 percent to 7.5 percent,” he said.


Relief May Be In Sight

Meanwhile, there is widespread speculation that the Federal Reserve will lower the prime lending rate by 0.25 percent the week of Aug. 20 and by another 0.25 percent in three weeks.

“In addition, with the injection of $74 billion into the lender markets by the U.S. Treasury, many Wall Street lenders are predicting softening in the rate pricing after Labor Day,” Gallegos said.

However, Reint Reinders, a hotel consultant and retired president and chief executive officer of the San Diego Convention & Visitors Bureau, said he thinks that the woes from the fallout in the subprime lending market will not be fully felt until next year.

“There could be a tightening of credit and re-balancing or re-pricing of risk,” he added. “But that doesn’t mean everything will be on hold.”

Some of the best hotel projects will get built, but in light of the county’s increasing hotel room inventory, lesser ones likely will not, he added.

Hotel owner and developer Doug Manchester, who owns the Manchester Grand Hyatt Hotel, the city’s largest convention hotel, agrees with Reinders.

“In my opinion, acquisitions and financing will be more difficult, but select properties will still get built,” Manchester said.

Among hotels Atlas Hospitality listed as being in the pipeline for San Diego are three with 1,280 rooms that Manchester is proposing for the Navy Broadway Complex, an eight-block waterfront site on North Harbor Drive. Office buildings are also planned.

Manchester said he couldn’t comment on financing as yet, since lenders would not consider the proposal before it’s given the go-ahead.

While the city has approved it, a coalition opposing the plan has filed two lawsuits to stop it and Manchester is suing the California Coastal Commission over whether a development permit is required. Those lawsuits are pending.

Two others that are among the largest in the pipeline locally are a 650-room hotel proposed by Miller Global Properties LLC of Denver to carry the Nickelodeon Resorts by Marriott flag at Liberty Station in Point Loma and a 600-room hotel by Sunroad Enterprises on Harbor Island. Executives with Miller Global could not be reached for comment, and Sunroad did not return a phone call.

While talks among Gaylord Entertainment, Chula Vista and the San Diego Unified Port District resumed this month regarding a proposed $1 billion complex containing a hotel with up to 1,700 rooms, Atlas Hospitality removed that from its pipeline list when Gaylord earlier withdrew its proposal.

Dave Kloeppel, Gaylord’s chief financial officer, said that the current shake-up in the lending environment would not affect the company’s decision to continue negotiations.

“For borrowers like us, who borrow based on the generation of cash flow on its assets, borrowing is slightly more expensive, but still widely available,” Kloeppel said.

Gaylord has hotels and conference centers in Nashville, Tenn., Kissimmee, Fla., Grapevine, Texas, and the Washington, D.C., area.

According to Atlas Hospitality, there were 9,970 hotel rooms under construction in Southern California during the first half of this year, 21 percent more than the same year-ago period, and 40,465 rooms were in planning stages, an increase of 41 percent. In Northern California, the tally of rooms under construction stood at 5,064, up 15 percent from the first half of 2006, while 24,443 were in the pipeline, up 67 percent.

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