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High-End Hotel Properties Up Ante on Luxury

Luxury hoteliers appear to be reaping the biggest returns in a healthy local and national tourism economy, and observers say the roster of new hotels on tap for downtown San Diego could significantly raise the posh quotient in places including East Village and the Gaslamp Quarter.

Civic San Diego is completing negotiations with locally based Cisterra Development on a mixed-use East Village project called 7th & Market, which is anticipated to include a 160-room Ritz Carlton hotel and 58 Ritz-branded condominium units, along with 156,000 square feet of high-end office space, a 40,000-square-foot gourmet grocery store along the lines of Whole Foods, and other ground-floor retail and restaurant tenants. Completion is expected in two to three years.

“That part of East Village is starting to see more of the high-end product coming in,” said Jason Wood, project principal for Cisterra Development, adding the developer is in talks with Whole Foods and other high-end retailers to potentially occupy the project.

That project is not far from the Gaslamp Quarter site where Encinitas-based Robert Green Co. and Montage Hotels have a $100 million, 317-room luxury hotel called Pendry San Diego under construction, with plans for a 2016 opening. Developers describe that hotel as an “urban destination for leisure and business travelers.”

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On the outskirts of the Gaslamp in East Village, San Diego’s J Street Hospitality is in the early planning stages for a new dual-branded, tower-style hotel set to open in late 2017 or early 2018. The room count has not been announced, but about half the property will house an upscale brand known as Canopy by Hilton, with the other half housing Hilton’s Hampton Inn & Suites brand, geared to business travelers.

Shaking Up the Scene

Hotel consultant Robert Rauch, president of San Diego-based R.A. Rauch & Associates, said the Gaslamp area has been home for several years to smaller boutique hotels appealing to younger, hip consumers, such as Andaz San Diego and Hotel Solamar. Those were part of downtown’s last significant wave of hotel construction and redevelopment, which happened prior to the Great Recession.

In the current post-recession economic cycle, experts said, East Village now has its chance to add long-awaited hotels. Early indications are that its new properties will seek to take luxury up a few notches, as hotels in the eastern portion of downtown look to compete with longer established properties in central and western downtown for high-end leisure and corporate business, such as the luxury U.S. Grant and the upscale W hotel.

Rauch expects that the new Gaslamp and East Village properties will be aimed toward what has become a significantly ramped-up effort by the hotel industry to serve affluent, under-35 millennials seeking out urban destinations for their business and leisure travels.

“They will probably also look to serve more of the downtown convention-goers looking for an experience with a little more pampering, and they will also appeal to the international travelers,” Rauch said.

Cisterra officials said the developer has commitments from Ritz Carlton, a subsidiary of Marriott International, to have its brand appear in the 7th and Market project, although a spokeswoman for Ritz said in an Aug. 3 email that she was “not aware of any signed projects for us in San Diego at this time.”

The Ritz Carlton would be downtown’s first five-star hotel and the first Ritz in San Diego County, and getting one to locate downtown would hardly be a slam-dunk. About 25 years ago, Rauch worked on a feasibility study on behalf of another developer who was looking into setting up a Ritz at Harbor Island, and concluded that economic conditions at that time would not support development of such a high-end property.

A couple of years after that, Rauch said, another developer came to the same conclusion after mulling a Ritz Carlton for a site in La Jolla (that location later became what is now Estancia La Jolla Hotel & Spa).

What Would a Ritz Bring

Alan Reay, president of hotel brokerage and research firm Atlas Hospitality Group in Irvine, said that if a Ritz does materialize in San Diego, it will likely have elements similar to the most recent U.S. Ritz to open, in 2010, at the LA Live development in downtown Los Angeles.

The downtown Los Angeles Ritz is part of a dual-branded project, with a total of 123 guest rooms, that also includes JW Marriott, among Marriott’s highest-level luxury brands. The same LA building also has luxury for-sale condos, many of which were purchased by Asian investors, Reay said.

Observers said today’s hospitality climate is much more development-friendly than that of the early 1990s. The latest U.S. numbers from travel industry research firm STR Inc. showed that chain luxury hotels were 76.1 percent occupied during the first half of 2015 — the highest occupancy rate among six pricing categories tracked.

The U.S. luxury category also registered significant year-over-year growth in all performance metrics, such as room revenue and daily room rates, as occupancy generally tracked upward with pricing among categories.

Adding to the appeal of San Diego for luxury-oriented hotel developers is that the local market is tracking ahead of national figures on nearly all growth metrics. STR reported that San Diego County hotels racked up more than $1.24 billion in revenue during the first half, up 12.2 percent from the same period of 2014, as revenue per available room grew 11.1 percent.

San Diego’s hotels were 77.4 percent occupied in the first half, and the local region beat national numbers for year-over-year growth in its occupancy, room rates and revenue per available room.

Rauch said downtown San Diego currently has about 12,000 hotel rooms, and new rooms currently under construction or in the pipeline — totaling around 2,000 — are not likely to create a glut. The upcoming rooms represent a variety of price points, he said, and they won’t be hitting the market at the same time.

However, one impact of the new luxury wave is that some older downtown hotels in coming years could be put under pressure to update their offerings to meet the latest demands of customers.

“If they don’t renovate, they probably won’t be able to compete,” Reay said, adding he would not be surprised to see an uptick in tear-downs of older downtown properties, to be replaced with new hotels.

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