When Pacifica Hotel Co. recently sold the 73-room Empress Hotel in La Jolla, company leaders said the sale would open up opportunities for the growth-focused firm to pursue new coastal hotel development deals.
Matt Marquis, president of the Santa Barbara-based company, says San Diego County remains on the firm’s radar for long-term development and acquisition opportunities in “water-centric” locations, as the local and national tourism economies continue to improve.
“Places like San Diego have high barriers to entry, so the competition tends to be limited,” said Marquis, whose company operates 25 coastal hotels, mostly in California.
However, Marquis and other experts predict that new construction of hotels will remain at a slow pace for the foreseeable future, despite a hospitality climate that is nearing full recovery from the recessionary depths of 2009-10.
They point to factors including a still tough financing environment for new projects, a glut of room inventory that still exists in some markets, and the potential for federal budget cutting to reduce hotel stays by government agencies and their associated contractors.
“Banks are very skittish to lend right now,” said Jan Freitag, vice president of global development for STR Global, formerly known as Smith Travel Research Inc. He said large resort hotel construction remains scarce nationwide, and the hotels getting built tend to be smaller, limited-service properties in previously underserved suburban markets, overseen by local rather than national developers.
Local Market Lags
STR data indicates that San Diego County’s hotel market tracked ahead of overall U.S. first-quarter figures for occupancy (67.5 percent), average daily rate ($126.74) and revenue per available room ($85.55). However, the local market lagged the nation in year-over-year percentage growth for the period on all of those metrics.
Local hotels posted $447.8 million in revenue during the first quarter, up 1.8 percent from the same period of 2012. U.S. hotel revenue rose 7.2 percent, to more than $27.1 billion.
Robert Rauch, president of hotel consulting firm R.A. Rauch & Associates in San Diego, noted that the local region has seen just a sprinkle of new hotel construction amid the overall tourism recovery. The few openings of 2012 included the Hilton Carlsbad Oceanfront Resort & Spa in Carlsbad, and a Hyatt Place mid-service hotel in Vista.
Following the recent debut of a 250-room hotel at Legoland California Resort in Carlsbad, the only notable large opening expected this year is a Residence Inn by Marriott, currently under construction in Carmel Valley. Rauch said there are several projects in the pipeline in places like San Marcos and downtown San Diego, but they are unlikely to move forward anytime soon.
The big game-changer for the local hotel development market would be completion of the planned $520 million expansion of San Diego Convention Center. More conventions being held locally would translate into more demand for hotel rooms.
With an expanded convention center up and running, Rauch said lenders and investors would be more amenable to backing hotel development projects in downtown neighborhoods like East Village and the Embarcadero.
Renovations and Repositionings
“The convention center expansion could be the difference between 1,000 new hotel rooms getting built locally in the next few years, or 3,000 rooms getting built,” Rauch said. “It’s a huge swing.”
For now, Marquis said Pacifica Hotel Co. will be focused on renovations and repositionings of its current properties, along the lines of work now being done by several operators throughout the San Diego region.
It will embark later this year on a renovation of its 128-room Best Western Blue Sea Lodge in Pacific Beach, where it anticipates investing between $2.5 million and $3.5 million, to be followed within the next two years by a similar updating of its 80-unit Sommerset Suites Hotel in Hillcrest.
Marquis said it is not unusual in the current climate for hotel operators to invest $15,000 to $25,000 per room in renovation projects. He said new construction probably won’t go forward in most local submarkets until unused inventory has been fully absorbed.
Pacifica Hotel Co. remains “cautiously optimistic” about future growth in revenue and occupancy, he said. Revenue at the private company’s hotels was up 10 to 20 percent in 2012, and the company is anticipating at least moderate further growth in 2013 and 2014.
It will continue to evaluate development and acquisitions in places like South County, as business activity picks up in that region. Marquis said the company’s Best Western Marina Gateway in National City, for instance, is already popular with Asian business travelers who deal with companies in Mexico, and there could be future demand for more hotel rooms as the cross-border economy matures.
“We are always scouting for opportunities in the San Diego market,” Marquis said.