Aug. 04–California, like the rest of the country, is in the midst of a hotel building boom, with more than 17,000 rooms under construction and 84,000 more in the pipeline.
The surge in development, following a years-long drought in new hotels, is captured in a mid-year report released by Orange County-based Atlas Hospitality Group, which tracks the hotel real estate sector.
San Diego County leads the state in the number of hotels that have opened so far this year — six — but Los Angeles dominates in the number of rooms under construction, with 6,772 in 37 hotels, reports Atlas. By comparison, San Diego trails far behind with four hotels accounting for 957 rooms in various stages of construction, the largest being a 400-room InterContinental on the downtown bayfront.
While Atlas only recently revived its once regular surveys on hotel development, the company already can see a marked increase in activity. Where San Diego County last year had six hotels with 711 rooms come on line, it already has added six new properties with a total of 1,017 rooms during the first half of this year, an increase of 43 percent, according to Atlas. Four of those hotels were integrated into two dual-branded properties.
The renewed interest in hotel development comes at a time when industry revenues and room rates have begun eclipsing pre-recession highs and occupancies are on the upswing. While demand remains high, there is still the potential for overbuilding, warns Alan Reay, president of Atlas Hospitality.
"We have to be mindful of how many hotels are going to be constructed and can the market absorb all the new inventory, but if we look back in history, we can see we've gone through a number of booms and busts where we've added too many rooms," said Reay. "I was just speaking to a lender this morning where he said you can't get a new construction loan today in Manhattan, so the lenders will shut down before the developers do."
Partly driving the zeal for development, says Reay, are the escalating prices that existing hotels are commanding, which in some cases are higher than what it would cost to build the same properties. He pointed out that developers are tending to gravitate more toward mid-scale, limited-service hotels, which are less expensive to build. However, two of the four San Diego hotels under construction — the InterContinental and the Pendry — are decidedly upscale.
"At the end of 2015, the average price per room for hotels sold in San Diego was $197,000, and that is well above replacement cost for select service hotels so that's why you're seeing a building boom," Reay said. "That sort of product is going to cost you about $100,000 to $120,000 per room, so if I'm going to pay $120,000 for a 30-year-old product, I'm going to look for a site where I can build a hotel."
He expects that of the 563 hotels statewide now in the planning stage, just 20 percent will ultimately get built.
San Diego-based Cisterra, which is still awaiting final approval on a $400 million downtown project that includes plans for a Ritz Carlton hotel that wouldn't open until late 2019, is unconcerned about the possibility of an oversaturated lodging market.
"For starters, the Ritz Carlton is only a 153-room hotel, and there is no other five-star hotel in downtown," said Jason Wood, a project principal with Cisterra. "We definitely believe that the market can absorb it whether it were to open today or three years from now.
"Now if I was sitting here today and starting the process to deliver a 500-room four-star hotel, then I might have some hesitation."
