Hospitality Management

Despite record high gas prices, this summer is providing strong returns for San Diego's hospitality industry. Now that we as an industry are into our third straight year with strong profitability, we must realize that eventually good times will come to an end. However, that does not mean we should not enjoy the ride!

In 2005, the United States lodging industry ended with an 8.8 percent rise in revenues and a 15.5 percent increase in profits, according to PKF Consulting. San Diego's hotel performance numbers currently mirror that of the United States. The profit increases are caused by revenue growth that is rate driven rather than occupancy driven, and though this pattern will continue, the pace of growth likely will slow.

While airlines suffer high fuel and labor costs as well as competition from discount carriers, hotels benefit from rising average daily rates. According to Smith Travel Research, average hotel rates will increase 6.5 percent in 2006. San Diego has been tracking head to head with that forecast this year and continues to benefit from having the best summer package of climate, outdoor activities and location proximate to drive markets like Los Angeles, Phoenix, Las Vegas and Northern California. The lack of new hotel supply has created a supply/demand imbalance that will continue to provide hoteliers with pricing leverage through 2008. Why 2008?

By 2009, San Diego will have added thousands of hotel rooms. Coupled with any deceleration in demand growth, (room nights sold) we will begin to feel the pinch and will not be able to continue to drive room rates. This cycle can only be interrupted with a fresh stream of new demand, caused by aggressive and focused marketing tactics that require expensive advertising. This advertising today must be both print and Internet, with strategic partnerships with all industry sectors.

To achieve this, San Diego's hospitality industry must be completely in sync (no more fighting between industry associations) and supported by the city of San Diego. After all, the beneficiaries of a strong hospitality industry include but are not limited to all residents (amenity package) and city officials (TOT). And the advertising must be focused on the customer -- that same customer who might get confused if the industry does not work together.

Here in San Diego we have a great opportunity to get a fresh advertising and promotion start. In David Peckinpaugh, we have a new San Diego Convention & Visitors Bureau (ConVis) president and CEO. The San Diego Convention Center (SDCC), two years after successfully separating ConVis from the responsibility of marketing the convention center, must remember that the single most important goal is our customer in San Diego. To avoid customer confusion, the SDCC must not compete with ConVis and vice versa. The organizations must work together and the boards of directors must ensure that staff goals are consistent with the customer as No. 1.

As I have mentioned previously in my columns, we will need hundreds of thousands of new room nights each year just to keep pace with new supply. If we add 6,000 rooms, we will need more than 2 million new annual room nights to keep pace and 3 million new annual room nights to get us to the 80 percent occupancy that this destination should have. I must press my case here for a Tourism Improvement District (TID). This would provide for a stable source of funding for the hospitality industry marketing engines (San Diego Convention & Visitors Bureau and San Diego North Convention & Visitors Bureau). Today, San Diego's competitors pay five to 20 times more than San Diego for destination marketing.

Trends occurring include new lifestyle brands, new guest room technology and a constantly evolving electronic marketing environment. San Diego is certainly well-represented in the new product arena with boutique hotels, wineries, spas, restaurants and retail establishments. We have new additions to our attractions, new shows, new and talented artists, new gaming properties, new golf resorts and more.

Concerns in today's market include terrorism, avian flu and natural disasters. We must be vigilant in our communication with our government agencies as well as within our industry. Economic impactors also include rising interest rates, material costs and rising operating costs. The interest rate increases coupled with material cost increases could slow construction, which might actually benefit those who own hotel properties. Rising operating costs include labor, utility costs, property taxes and insurance, though insurance is not rising as it has in past years.

For the next 12 months, hotel values should continue to increase. Increasing hotel construction costs will drive up the desirability of buying existing assets in contrast to building new. Today's buyers are looking for a more modest return than in prior years. This is a result of having pension funds and Real Estate Investment Trusts as buyers of large assets. These groups are generally content to see a 10 percent to 12 percent return on equity. This makes for a good time to be both a buyer and a seller -- there is still upside in deals and yet, values are approaching the peak. To a great second half of 2006!

---

Rauch serves as chairman of the San Diego County Hotel-Motel Association and is Vice-Chairman of the San Diego North Convention & Visitors Bureau. He is a lecturer at San Diego State University and is managing partner of the Homewood Suites by Hilton San Diego/Del Mar. He can be reached at robert.rauch@sddt.com. Comments may be published as Letters to the Editor.