The economy is on solid footing right now despite the housing-market slump. Interest rates are below historic levels and are stable, unemployment is low, inflation is under control, and most economists view capacity utilization as continuing to move higher. Moreover, foreign countries are seeing the United States as a safe haven for investment. We have not built much new supply, so demand has been outpacing supply, allowing hoteliers to drive rates, which in turn drive profits.
According to UBS, U.S. lodging room revenue growth will be 9.1 percent in 2007 and 9.7 percent in 2008, and U.S. lodging supply growth will accelerate from about 1.1 percent for 2006 to 1.9 percent in 2007 and 2.3 percent for 2008. However, UBS believes the more appropriate metric to watch for investing in hotel stocks should be urban-supply growth (where most public lodging companies generate the volatile portion of their earnings). They are forecasting urban-supply growth will be 0.8 percent in 2007 and 1.1 percent in 2008. They believe urban-supply growth is not a problem until it exceeds 1.5 percent.
Having said that, San Diego's urban-supply growth over the next two years is closer to 10 percent! Most lodging markets have more difficulty building downtown than in suburban locations. The reverse is true in San Diego, where zoning is much more onerous on developers in suburban submarkets when compared to the center city. This, coupled with the success of San Diego's Convention Center, has brought thousands of new rooms into the pipeline, many of them currently under construction.
In addition to the renovated U.S. Grant, the Hard Rock, Sofia, Ivy, Keating and others downtown, we are beginning to add product now in Point Loma and up in Carmel Valley, Carlsbad and Oceanside. But these hotels will be absorbed into the supply because of the combination of economic growth, a strong desire on the part of meeting planners and leisure travelers to visit San Diego and a very savvy tourism industry leadership that is planning to introduce a vehicle for more tourism promotion spending this next fiscal year.
Tourism improvement district
The aforementioned tourism promotion fund is referred to as a "tourism improvement district," or TID. The TID would cause visitors to pay an assessment of 2 percent on top of the 10.5 percent transient occupancy tax (TOT) and would provide a dedicated, stable source of funding for tourism promotion so that San Diego can compete with other destinations.
This is critical as San Diego lags in spending against its competitors. Markets like Las Vegas (spending more than $250 million per year) and Orlando (spending more than $70 million per year) are manufactured destinations that constantly outperform others due to market spending. San Diego's arts, attractions, beaches, culture, climate, golf, gaming, meeting sites, restaurants, retail, spas and wineries represent a more natural tourism landscape than most tourist destinations.
If for some reason the TID fails to be enacted, the triple witching hour of significant additions to supply, deterioration of economic conditions and no money to promote tourism will have a profoundly negative impact on hotel financial performance. In that the economy is cyclical, this is only a matter of time. We have had two great years and I believe another two will follow. All bets are off in 2009.
San Diego is blessed to have San Diego State University's hospitality (HTM) program here and growing quickly. With 500 motivated students in the program, this market is armed with loads of talent to help manage the growth of this industry. Lecturers and professors alike have years of "hands-on" experience in the hospitality industry. We are one of the few tourist destination markets to have this great resource.
Students who have completed their HTM studies at SDSU have management, leadership, finance and communication skills. They are motivated to succeed in this industry and have really helped many hospitality companies avoid the problem of finding qualified management talent.
According to Yesawich, Pepperdine & Brown, travel suppliers will attempt to raise fares and/or rates, and the concept of "inclusive pricing" (one price for a bundle of basic services) will grow in popularity beyond destination resorts. If he is correct, commercial hotels will offer business travelers good value for "just the basics" (a comfortable bed, a good working desk, breakfast, high-speed Internet access and reward points).
Another area that is seeing large growth is "spa-going." Yesawich believes "the spa industry will continue to grow as more consumers seek ways to manage the mounting stress in their lives." We are planning to put a spa in our Hilton Garden Inn, scheduled to open later this year. It will be the first Hilton Garden Inn in the world with a true spa.
Let's promote tourism by approving a TID this year, hope for a continued strong economy and build new product very carefully and thoughtfully. Have a wonderful 2007 and beyond!
Rauch is chairman of the San Diego Hotel and Motel Association and vice chairman of San Diego North Convention & Visitors Bureau. He also serves on the board of directors for San Diego Convention Center Corp. and teaches entrepreneurship at San Diego State University. He can be reached at firstname.lastname@example.org. Comments may be published as Letters to the Editor.