Are San Diego hotels nearing the end of a 9-year boom cycle?

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Are San Diego hotels nearing the end of a 9-year boom cycle?

Are San Diego hotels nearing the end of a 9-year boom cycle? (Dreamstime/TNS)

SAN DIEGO – After celebrating nearly a decade of impressive growth since emerging from the recession, the hotel industry – both nationally and in San Diego – is coming to grips with a pronounced slowdown in both occupancy growth rates and revenue.

While hotel revenue growth last year was up ever so slightly for the nation as a whole, in San Diego County it fell by more than 2%, marking the first yearly decline since 2009.

New data released by the firm STR, which tracks hotel industry performance, reveals that the percentage of filled hotel rooms, while still relatively high for San Diego County, at nearly 77%, fell in 2019, as did revenue per available room, a standard metric used in the hospitality industry to measure hotel performance. It is calculated by multiplying a hotel’s average daily room rate by its occupancy rate.

By comparison, revenue per available (RevPAR) rose consistently in past years, increasing anywhere from 3.2% in 2010 to 9.1% in 2014.

The net effect for consumers, at least in 2019, was that room rates barely rose – by 0.2%, or just 34 cents a night across all properties in the county – reports STR. Just a year earlier, room rates jumped by nearly 4%.

Despite the seemingly grim growth numbers, it might be too early to conclude that the nearly decade-long growth wave is coming to an end. Nationally, the industry is still experiencing record-breaking performance levels, but a rising wave of hotel openings both locally and across the county could depress growth.

That was especially the case in San Diego County, where overall supply grew by 2.5% but demand for rooms was largely flat. Over the last two years, the county saw nearly 3,000 additional hotel rooms come online. Consumers could well be the beneficiaries of hotel developers’ continued enthusiasm for San Diego, at least in the near term.

“San Diego hoteliers still sold 76.7% of all rooms, filling three of four rooms on average every night,” pointed out Jan Freitag, senior vice president for STR’s Lodging Insights. “But the decline in occupancy coupled with anemic demand growth led hoteliers to keep prices steady. We actually saw room rates decline in the six consecutive months starting in June, which may be a sign of things to come.

“Going forward, we expect that San Diego will continue to attract capital and development dollars but with the U.S. economy only moderately expanding, demand growth in the hotel industry will also be sluggish. This will probably mean less pricing power going forward, and consumers may see that as a positive.”

San Diego hotelier Robert Rauch, whose RAR Hospitality manages nine hotels in San Diego County, accounting for more than 1,000 rooms, said he’s experienced firsthand the slowdown, which he says has made it difficult, if not impossible, to raise room rates. Besides the increase in the number of hotel rooms countywide, another factor accounting for slow or no growth in revenue was that 2019 was a down year for the city’s cycle of citywide conventions, which rotate around the country, Rauch said.

“We had a tough year in occupancy so we were unable to raise rates, and costs have been going up at a very rapid rate so profits are down,” said Rauch, whose hotels are largely located outside of downtown San Diego. “If debt and equity continue to be available, there will continue to be supply growth because we’re still the sixth strongest in occupancy among the top 25 markets in the U.S. and No. 7 in average rates.

“One thing we did recently was add a $10 fee for parking because we found a lot of resistance to raising average rates, so that helps a little bit. I typically don’t like to nickel and dime customers but we were unable to pay for the increased costs elsewhere.”

Hotel owner-operator Elvin Lai said he, too, saw a down year but that was, in part, because his Pacific Beach hotel, the 71-room Ocean Park Inn, was overdue for a renovation, which got underway in October.

“I also believe that the new “Star Wars” attraction at Disneyland was a factor because people made an effort to go there instead of their normal leisure destinations,” he said. “And with Mammoth having snow until July, people spent their money for their leisure destinations there, as opposed to the beach.

“For this year, I’m different from everyone else, because I’m projecting an increase next year because of our renovation, while others are saying they’ll be flat or down two points.”

For the nation as a whole, STR is projecting growth in revenue per available room to come in at well below 1% for 2020.

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