Hotel And Tourism Gurus Discuss Why San Diego Is A Hot Market For Hotel Development

With hotel values increasing and sales slowing, the question arises of where we are in the cycle, says Allen Matkins partner Clark Libenson, who moderated a panel at Bisnow’s San Diego Hospitality Development Takeoff last week.

Clark (pictured left, with Chris Dobbins and Joe Terzi) asked that question of panelists.

“I think we're probably at the top and are cresting the hill in the cycle,” said Hyatt Hotel VP Chris Dobbins. "I hope it stays up here for a while. Hotel sales, hotel occupancy and hotel rates have definitely recovered since the Great Recession—the cap rates are lower, but I think we’re probably going over the other side of the hill soon. Already we’re seeing construction financing get more difficult with the banks. We’re also seeing a lot of lenders require more equity in deals to get them done—so we’re probably in the 11th inning." 

San Diego Tourism Authority CEO Joe Terzi (below with Thomas DeSousa) said during the past couple of years valuations have been really high, with the price paid per room exorbitant in some cases. “So I think we’re seeing the opportunity to build new is actually maybe more cost effective than acquiring some of these assets," he said.

Portman Holdings SVP Thomas DeSousa said if it's the 11th inning, it’s wise to look at deals and be more selective. "Location has a lot to do with it," he said. He expects secondary and tertiary markets will fall off quickly, as everyone fights for prominence in the prime markets.

Downtown SD is still very attractive, with a lot of new projects under construction and contemplated, Joe said, citing The Pendry and InterContinental hotels under construction, the coming Ritz-Carlton, and the proposed redevelopment of Seaport Village and rental car facility, which will include significant hotel development. He said there’s still land available in Downtown, but also large parcels of land available throughout the region, such as at Chula Vista’s Millenia master planned development. “From a product standpoint, the proliferation of the mid-scale and limited-service product really fits well in a lot of the secondary areas of the San Diego market,” Joe said.

Responding to a question about product mix in Downtown, Chris said competition with apartment and condo developers, who are paying astronomical prices for land, makes it difficult to put select-service in Downtown, though a few have popped up, like Portman’s dual-branded Springhill Suites & Residence Inn.

Joe said he had wondered why Portman put two Marriott brands in the same building, but Thomas explained the brands have uniquely different customers. 

Thomas said two brands in one building help with synergies and economies of scale. “The flow-through margins we get from the two hotels have a great deal to do with our great general manager Mike Murphy, but also with the ability to operate two distinct hotels with one executive committee and one infrastructure behind the house,” he said. 

Thomas said the arrangement also enhances Marriott’s ability to sell to its customer base. Portman designed the project with a clean pallet, so when guests enter the lobby, it’s a blend of the two brands.

In designing BRIC (Broadway + Pacific Highway), a destination retail project on the waterfront between the dual-branded Marriott and Portman’s InterContinental Hotel rising next door that includes Lane Field (the original Padres ballpark), Thomas said the idea was to open up the waterfront view for people in Downtown. “That’s why our buildings don’t flank the waterfront, but open it up, so your eyes are drawn to the water. 

"We hope that people from the Gaslamp, as well as from Little Italy, will come down and visit us,” he said. Portman is working with national brands like CVS to scale down store size from 40k SF to 4k SF to meet the more limited needs of hotel guests and the neighborhood. “We also want to bring in cool, hip, trendy restaurants that resonate with our customer base,” Thomas said.

Land for new hotel development in Downtown is limited. Joe said while the large parcels controlled by the Port are important, there’s still other parcels in Downtown available, like the one occupied by the new 300-room, Pendry Hotel brand by Montage. He said this is Montage’s first attempt at a luxe hotel and resort in a central city environment and the design fits the Gaslamp, with the entire bottom floor dedicated to restaurants and entertainment. This project will demonstrate whether a hotel of this level and size can be successful here, Joe said.

Clark also opened discussion of the convention center expansion, proposed funding for a Chargers stadium and the interplay of the two projects. Thomas said his biggest concern with the Convadium concept is the disconnect between buildings and lateral spread. He said Las Vegas meeting space is stacked and escalators move people between sessions in minutes. With just a few minutes between sessions, it would be difficult to move people between disconnected buildings, he said.

Joe's organization does not support the Chargers’ Citizen’s Initiative or Corey Briggs’ Citizens Plan, he said, listing the reasons. San Diego has one of the most successful convention centers in the country, north of 70% occupancy, which is basically full, he said. “We have huge demand and a customer base that most of our competitors would like to have at their convention centers. This not just because of the convention center, but it’s the destination, the hotel product, the Gaslamp—the whole package.

“We have had multiple conversations over multiple years with customers about this expansion,” Joe said. "Every single one, every time we have this discussion, says the same thing: ‘If you want us to be in San Diego, to stay in San Diego, to be part of who you are, then you need to expand the existing center. If you want to build meeting space elsewhere that’s great, but that’s not going to meet my needs.’ So this is a functional issue about retaining customers.”

San Diego is the 22nd-largest convention center in the nation, with just 500k SF, and many of its competitors are planning expansions or are under construction.

“The Chargers are proposing a meeting space with a stadium, not a convention center,” he said. Raising the transient occupancy tax more than 30% to build a building that has limited impact on the tourism industry, on hotel night stays and attracting business to the destination, “is a bad deal,” he said.