The United States economic performance has been strong this year with March and April numbers continuing the good news. The steady growth in gross domestic product is largely attributed to the combination of business investment and home prices.
The rising home prices have provided for strong consumer spending. The federal government's fiscal policies have also been responsible for calming any market fears.
Concern on the horizon
Near term concern is caused by the recent spike in gas prices, the possibility of reduced housing prices and a reduction in consumer spending fueled by the increases in household debt levels. The potential for a housing slowdown could have a dramatic effect on consumer spending. It is believed by many analysts who recently sat on a Federal Deposit Insurance Corporation Roundtable that much of the consumer spending of the past few years has been sustained by real estate wealth. In addition, changes in mortgage structure going forward could provide for too much leverage or risk for many households.
Moreover, the U.S. household savings rate was negative for the first time since the Great Depression, according to the Bureau of Economic Analysis. This does not necessarily point to problems, merely that there are inherent risks with current and recent consumer spending patterns. Management of fiscal policy by our government has been remarkable and interest rate increases have been measured and apparently effective.
Notwithstanding the concerns on the horizon, I believe we will have a strong economy for another 2-3 years. Naturally, there is always the risk of war, terrorism, natural disasters or market disruption caused by monetary policy changes.
Tourism and hospitality
The tourism and hospitality industry, much like the economy, is cyclical. We saw peak performance in the late 1990s, a contraction period from 2001-03 and a recovery over the past two years. Today, we are in the middle of this period of stability and sustainable growth. The meetings market, much like the hotel industry itself, is in a period of stabilized performance according to a recent survey of meeting planners conducted by PKF Hospitality Research.
The gas prices have been the most obvious cause for concern in that we all see the prices at the pump. While it is true that the tourism industry is vulnerable when this "sticker shock" occurs, the average trip cost might increase just $30, according to the American Automobile Association. This might reduce spending on vacations but should not cause widespread trip cancellations.
In addition to the economy, changes in supply and demand patterns may cause shifts in hospitality industry performance. According to UBS Investment Research, net new supply growth will be 1.5 percent in 2006, growing to 2.2 percent in 2007. Demand growth should easily cover that increase in national hotel supply. Smith Travel Research reports revenue per available room growth of 12.4 percent in the top 25 markets in March 2006 and all indications point to a strong demand for the next couple of years. San Diego's supply/demand dynamics should mirror the United States.
New construction costs have risen at double digit rates the past two years. This, coupled with the strength of other real estate sectors will keep supply growth at a manageable level through 2007. This, however, might change by 2008-09. Typically, when the industry begins to hit a peak, supply growth also increases. Unfortunately, when that supply actually hits the market, demand begins to slow. This has happened in every economic cycle. Why? Lenders and equity players look at the past 12 months as prologue. With the strength of the market going forward, the numbers they see will be very strong. Ergo, when an economic downturn occurs, and it will, the industry will be left with more supply than needed.
Tourism as an amenity package
The tourism industry brings an incredible amenity package to San Diego and that package will be even better after we have increased our hotel supply downtown. It's strength relies on funding the marketing engines (San Diego Convention & Visitors Bureau and San Diego North Convention and Visitors Bureau) and leveraging the great attractions that we have here such as the San Diego Zoo, Wild Animal Park and SeaWorld to name a few. Funding the marketing engines at a level commensurate with the competition will ensure a healthy tourism industry for years to come.
The arts, attractions, culture, retail centers, restaurants, spas, wineries and more would not be here in abundance without this industry. According to the Travel Industry Association, each household would pay nearly $1,000 more in taxes each year without the tax revenue generated by tourism.
An increase of just one percent in tourism spending by visitors to San Diego would create $58 million in additional visitor spending, $13.9 million in additional hotel spending and over $1.4 million in transient occupancy tax dollars according to statistics collected by San Diego ConVis. In addition, every dollar of advertising by ConVis delivers $6.60 in lodging tax revenue and $18.80 in total tax revenue based on a 2006 study by TNS. The bang for the marketing buck is awesome! Let's celebrate National Tourism Week (May 13-20) by supporting the industry. My personal thanks to the leadership displayed by Mayor Jerry Sanders and Council President Scott Peters in protecting our investment in this critical industry.
Rauch serves as president of the San Diego County Hotel-Motel Association and serves on the board of directors of the San Diego Convention & Visitors Bureau, the San Diego North Convention & Visitors Bureau and the Lodging Industry Association. He is general manager/partner of the Homewood Suites by Hilton San Diego/Del Mar. He can be reached at firstname.lastname@example.org. Comments may be published as Letters to the Editor.