In 2006, most economists believe the Federal Reserve will stop tightening after the first quarter. Demand indicators such as capacity utilization are expected to continue to move higher, resulting in more business activity and business travel. UBS expects U.S. lodging room revenue growth to be 8.9 percent in 2006 and 9.0 percent in 2007. According to Smith Travel Research (STR), hotel room night demand will be up 3.6 percent in 2006, a slower growth than 2005 produced (4.4 percent). The average daily rate is projected to be up 5 percent over 2005, which was up 5 percent over 2004. STR forecasts another 5 percent growth in the average daily rate in 2006 and a 3 percent increase in room demand in 2006. I certainly believe we are in the midst of a multiyear recovery in the lodging industry.
San Diego County is known to have five large industry employment clusters. Biotech, wireless communication, telecommunications, the military complex and information technology are all strong industries. San Diego is also widely recognized as having a leading convention and visitors bureau, leading convention center, enviable "year around" destination and one of the most impressive hotel occupancy and average rate statistics in the U.S. lodging industry. As such, every competitor puts their best sales person up against us and competes aggressively when meeting planners consider a destination. To counter those daily battles, we are now adding the Hilton Convention Center Hotel and continuing to improve our attraction and restaurant package throughout all of San Diego and San Diego North. But that is not enough.
Over the past few weeks, as president of the San Diego County Hotel-Motel Association and board member of the Lodging Industry Association, I have been part of an educational outreach to hoteliers and tourism industry officials in the community regarding the possible implementation of a Tourism Improvement District (TID). This TID would add 2 percent to the bill of each guest at a hotel in San Diego if approved in the current draft form. Approximately $24 million could become available to market San Diego if this plan is implemented. Why is this being considered? This assessment would provide a dedicated and stable source of funding, establish private-sector control and accountability and strengthen a unified voice for our destination.
The city of San Diego also would benefit, in that some of the existing Transient Occupancy Tax (TOT) funds collected could go to critical city needs. This concept requires important dialogue with hoteliers and city officials alike. Today, the percentage of TOT allocated to both the San Diego Convention & Visitors Bureau (ConVis) and San Diego North Convention & Visitors Bureau (SD North) has decreased rapidly, from 20 percent to ConVis when the TOT was first instituted to less than 8 percent of funds collected today. This allocation is dangerously low and puts ConVis at risk for continued losses in market share. Moreover, SD North is now down from $500,000 to under $400,000 this past year. SD North first brought the TID concept to tourism industry leaders two years ago.
The outlook for San Diego County tourism is for moderate growth in 2006. The forecast (San Diego Convention & Visitors Bureau with assistance from CIC Research and R.A. Rauch & Associates Inc.) calls for a slower growth of 2.0 percent among hotel visitors. Looking ahead to 2006, this consensus forecast is for 125,000 room nights to be added in the leisure segment, another 60,000 in the hotel meetings segment, 50,000 in convention center groups, and an estimated 50,000 in the individual business traveler segment. I believe we can look for close to a 5 percent increase to over $127 average daily rate in 2006. My fear is that whether it is a "soft landing" or "recession" in our future, at that time, the reduced spending on marketing, coupled with the new supply increases in the pipeline, will take a huge toll.
Philip Kotler, author of Marketing for Hospitality & Tourism states, "tourism's most visible benefit is direct employment in hotels, restaurants, retail establishments and transportation. A second but less visible benefit consists of support industries and professions (as an example, there are 34 different types of companies that are members of the San Diego Convention & Visitors Bureau), many of which pay considerably more than the visible employment opportunities such as restaurant personnel." Kotler's stated third benefit of tourism is the multiplier effect, as tourist expenditures are recycled through the local economy, with a fourth benefit of state and local revenues derived from taxes on tourism.
San Diego's fine restaurants, hotels and attractions serve locals and visitors alike. Without these aforementioned entities, local residents would not have the "amenity package" that comes with tourist activity. Moreover, the return on investment for each dollar spent on tourism industry marketing is 6-1 on TOT dollars alone, according to a recent return on investment study commissioned by ConVis. That increase in tax revenue is only one aspect of the return on each dollar invested in tourism marketing. There is no other industry that can provide that kind of return!
I have every confidence that our new mayor will do a super job with America's Finest City, despite the dire financial conditions we face. So let's all make a fresh start this year -- looking back is not an option, as life is too short. Embrace the New Year with all it has to offer and make 2006 a great year to remember.
Rauch is general manager and partner of Homewood Suites by Hilton San Diego/Del Mar and president of the San Diego County Hotel-Motel Association. He serves on the executive committees for ConVis and SD North, the board of directors of the Lodging Industry Association and teaches hospitality entrepreneurship at SDSU. He can be reached at firstname.lastname@example.org. Comments may be published as Letters to the Editor.