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County Experiences Drop in Hotel Rooms Being Built

While San Diego County led all others in the state in terms of the number of new hotel rooms under construction, a development report shows that the total number in the pipeline has dropped dramatically when comparing the first half of 2004 with the same time frame last year.

According to the 2004 Midyear California Hotel Development Summary by Costa Mesa-based Atlas Hospitality Group, one of the state’s largest hotel brokerage firms, there were 7,445 rooms in the planning stages between January and June in San Diego County, down 33 percent from the same period in 2003.

“The reason is that San Diego developers are looking to change the use of the sites to condos and mixed-use developments that include retail,” said Atlas Hospitality President Alan Reay. “There are also some issues with entitlements. Some developers are looking to put a 200-room hotel on a site, and the city is coming back saying they can only have 100.”

Financing for hotel projects was freed up in the third quarter of 2003, following a dry spell that came in the advent of the September 2001 terrorist attacks. Financing for hotels is still plentiful, Reay said.

San Diego led the state with 1,325 new rooms in six hotels, including the 512-room Omni Hotel San Diego and the 210-room Estancia Hotel La Jolla, during the first half of the year.

But the report shows that total was off by 6 percent compared with 1,409 rooms added in the first half of 2003.

According to Carl Winston, director of San Diego State University’s hospitality and tourism management program, the high cost of land is a constraint hotel developers face, particularly when weighed against the uncertainty of the county’s continued status as a highly popular tourism destination.

“There is uncertainty now over the TOT (transient occupancy tax) increase,” Winston said.


Marketing Concerns


There also is concern about San Diego’s popularity as a tourist destination with the depletion of funding for the San Diego Convention & Visitors Bureau.

“There’s fear that the city’s not going to be marketed well, and tens of millions of dollars of investment in a hotel project is not something you do lightly.”

After two years of flat subsidies from City Hall, ConVis saw a 10 percent reduction in its funding in fiscal 2003-04 and an additional reduction of $2.7 million, or 21.5 percent, for 2004-05. Its current operating budget, including revenue from membership dues, is $12.5 million.

Condominium investments, particularly in Downtown, may be a “safer bet” for developers, and they are in high demand, because of the county’s need for more housing, Winston stressed.

“It’s the risk profile,” he said. “If you build a condo Downtown, you sell it and you’re done. But if you build a hotel you have to fill those rooms every night that you own it.”

New Trend

Meanwhile, there’s a new development trend, combining condominiums with hotels, Winston said. It hasn’t reached San Diego yet, but he thinks it’s coming.

Unlike timeshares, owners buy individual rooms or suites outright, as they would a condo. They may either use them themselves or rent them out nightly or for any amount of time they wish.

“They can put it back into the hotel or rent it out as a unit,” Winston said.

Meanwhile, San Diego County is not the only area in California that will witness a decline in hotel room development in the near future. There were 8,443 rooms planned during the first half of the year in Los Angeles County, down 30.9 percent from the like period the year before and 2,559 in Orange County, a drop of 47.5 percent.

On average, nine Southern California counties , San Bernardino, Riverside, San Luis Obispo, Ventura, Santa Barbara, Imperial, Los Angeles, San Diego and Orange , had a decline of 38.3 percent in hotel rooms planned during the first half of 2004 compared with the first half of 2003, according to the report.

“There’s no simple answer” as to why, Reay stated in the report. But “the slowdown in rooms planned should bode well for hotel owners as it minimizes new competition, and as such, points to higher long-term profitability.”

Meanwhile, San Diego had a 56 percent decrease in the number of new rooms opened , 790 in three hotels during the first half of this year, compared with 1,777 in eight hotels in the same period last year.

Of the major Southern California counties, only Los Angeles posted an increase , 35 percent , in its inventory of new rooms, comparing 334 in four hotels vs. 241 in three hotels.

Orange County had a decrease of 74 percent , 400 rooms as compared to 1,777 and Riverside County had 47 percent fewer rooms, comparing 175 to 331.

But with 1,058 hotel rooms under construction, Riverside County was second behind San Diego County in the number being built in the first half of 2004.

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