The Pendry is not just San Diego’s latest upscale hotel. The luxury complex includes six restaurants and bars, a spa, a rooftop pool and 35,000 square feet of meeting space. It also adds 317 rooms to downtown’s existing stock of roughly 20,000 hotel rooms. And, with its location on J Street between Fifth and Sixth avenues, it is poised to capture its share of conventioneers.
While it’s now the latest and greatest in downtown, it will soon have competition. A slew of nearby hotels are coming, including Carte Hotel & Conference Center, a 239-room facility near Little Italy on which construction began in September; and the InterContinental Hotel, which will add 400 rooms at Broadway and Pacific Highway on the site of old Lane Field.
This comes on top of 1,017 rooms that opened in the county last year, including the 400-room Marriott SpringHill Suites-Residence Inn on the Lane Field site and 364 rooms at Homewood Suites and Hilton Garden Inn less than a mile north on the former Fat City site.
Plus, three hotels with a combined total of 643 rooms are in the works for Liberty Station, and seven hotels are scheduled to open in downtown before the end of 2019. This brings the grand total to 4,489 new hotel rooms to be added between January 2017 and the end of 2019.
This does not include a Ritz-Carlton that was recently approved. It’s slated for just a few blocks east of The Pendry, between Seventh and Eighth avenues and Market and Island streets. The 153-room Ritz will be San Diego’s first five-star hotel.
Nor does the count include the Manchester Pacific Gateway development, which is expected to add 1,350 rooms along the Embarcadero, or three other hotels with a total of 1,075 rooms planned for the Seaport Village redevelopment.
All of these projects combined add up to more than 7,000 rooms, or an increase of 11 percent countywide. But most of the new developments are downtown, with the downtown submarket adding more than 4,200 rooms, for an increase of more than 20 percent.
Obviously, the big question is whether there is enough demand for all these additions. And, if not, will San Diego’s occupancy rate — typically one of the highest in the country at about 76 percent — begin to tumble? Experts say they’re not worried about the state of San Diego’s hotel industry, for several reasons.
“Until last year, there was about a 10-year hiatus where we didn’t have any new hotel rooms built,” said Alan Nevin, director of economic and market research at the Xpera Group, a construction forensics and management company. “We haven’t had any big ones added since the era when the Marriott and the Hyatt on the water and the Omni and Symphony Towers were added, and that was like 20 years ago. We’ve added some boutique hotels in the last decade, but really not enough to keep up with demand.”
Nevin said the scarcity of new rooms was due to a lack of financing caused by the recession. The demand comes from conference attendees at the San Diego Convention Center and the return of the cruise ship market, he said.
“Ten years ago we had about 850,000 passengers on the cruise lines, and most of them were going to Mexico,” Nevin said. “And with the crime rate in Mexico, we dropped down to 200,000 — we dropped 75 percent. Gradually, as the crime has diminished, cruises are picking up a little bit, and with cruise ships, people usually come in a day or two ahead of time and stay in a hotel, so it’s great for hotels and retailing.”
Another reason industry watchers aren’t too worried is that although these hotels are approved and planned, it’s unlikely that they’ll all come to fruition.
“It’s my anticipation that even though many more than 3,000 rooms are planned, no more than 3,000 are likely to be built,” said Bob Rauch, CEO of RAR Hospitality, a hotel management and consulting firm.
Each hotel will need financing, which could become hard to get if there’s even a slight downturn in demand or another economic slowdown. Then there’s the question of whether a new or improved Convention Center will be needed to keep conference numbers and attendee numbers high enough to fill the planned rooms. The Convention Center expansion has been stalled by legal challenges and may not be realized.
Rauch said there is a 2.5 to 3 percent yearly increase in room demand. At that rate, it would only take the county three to four years to absorb the added rooms. But downtown could take longer. If all the rooms planned for downtown move forward, it would take the submarket seven years to absorb them.
“Which means we’ll peak at 80 percent occupancy downtown. We might — on a worst-case scenario — dip to the mid 70s for a while and come back up to 80 within six years,” he said.
“I think the real question is whether or not we’re going to build a Convention Center [expansion]. If we were to build, say, more than 3,000 rooms, and not add any new demand, then we’d probably be where you start saying, ‘Maybe we overbuilt.’”
Gary London, president of The London Group Realty Advisors, agreed it’s unlikely that all 7,000 rooms will be built. Hoteliers are trying to get financing now, while the market is good, with high occupancies and room rates. But should there be a downturn, hotel financing will be the first thing to go, he said.
London also pointed out that the hotels planned and under construction all appeal to different markets, and he cautioned against tying their potential success to each other.
“Every one of these hotels appeals to a slightly different market segment, so there’s no way you can make a broad generalization of the hotel market and health,” he said.
While the Ritz-Carlton will appeal to luxury travel visitors, The Pendry is aimed at the convention market. The Manchester will target conventioneers but also general visitors.
“I think a lot of the hotel investments are being driven by the near-term prospects of at least, over the short term, a prosperous business cycle,” London said. “Should that change, some of those hotels aren’t going to be built, at least in the near term. They’ll be pushed out a bit.”
Downtown also may have more competition in the near future. Mission Valley — the cheaper, less glitzy step-sibling of the downtown hotels — offers good location at more affordable rates. But Destination Hotels is remaking Town & Country into a 700-room higher-end resort, and the new owners of Crowne Plaza San Diego – Mission Valley hope to do something similar with their 419-room facility.
But experts say those facilities won’t compete for conventioneers.
“Most people that stay for conventions are guided by proximity to the Convention Center as their first choice when they are looking for a convention hotel, and the second decision is price,” London said. “This is where Mission Valley typically fits in, because the price(s) in Mission Valley hotels across the board are an order of magnitude lower than downtown hotels.”
London said demand for most Mission Valley hotels should remain strong because of their lower prices. But, if the downtown hotel market does get overbuilt and demand from all three main visitor sectors — convention attendees, general business travelers and tourists — drops, then the downtown hotels might cut rates, eating into Mission Valley’s competitive edge.