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Financing for hotel construction here lacking, but maybe not for long

For those trying to build, buy, sell or refinance a hotel these days, it's ugly out there, but they may be rewarded if they are able to hold on for another year.

The status and future of San Diego's Southern California's and the national hotel industry was the topic of discussion at a PKF Consulting-sponsored seminar at the Del Mar Marriott Wednesday afternoon.

While a handful of projects are coming on line in San Diego County -- including the 1,200-room Hilton hotel next to the Convention Center later this fall, PKF said once those properties under construction are complete in the coming months, there will be a lack of hotel construction starts throughout Southern California until 2010.

As difficult as that may sound, Bruce Baltin of PKF Consulting said San Diego should emerge from its slumber earlier than other areas of the state and the country.

Three reasons for this is the argument we need the rooms, it is a desirable place to visit, and much of the visitor traffic we receive comes by automobile.

San Diego, with its diversified economy, has another advantage, according to PKF.

While wages and employment are expected to decline over the next four quarters here, the drop off is expected to be as long as six more quarters in Orange and Los Angeles counties -- both hit even harder than San Diego by the collapse of the mortgage industry and capital markets.

Mark Woodworth of PKF Hospitality Research, a division of PKF Consulting, said San Diego is also more fortunate than the other counties in that it didn't build more hotel rooms than the market could handle, unlike other parts of Southern California.

"Generally, the hotel supply was increasing in most markets when the economy was declining," Woodworth said.

Woodworth said while the increase in the number of hotels in Southern California was only up about 1 percent, which can end up being a lot in a down economy.

Aside from the new Hilton, other hotels being added here will include a 240-room Residence Inn in the Gaslamp Quarter scheduled for November 2009; the 210-room Hotel Indigo, another Gaslamp Quarter property slated to come online in July of next year; and the 184-room Setai San Diego at 240 Broadway in downtown San Diego opening this month. Smaller hotels are going up from the South Bay to Oceanside as well.

San Diego -- save for the period after 9-11 has managed to consistently keep its hotel occupancy in the high 60s and low 70 percent ranges during most of the decade.

This has meant that when hotels have been built, they have generally filled quickly.

And while the Hilton will add 1,200 rooms to the market before the end of the year, the hotel is expected to quickly fill as well.

This is because the San Diego Convention Center Corp. has had to turn away hundreds of millions of dollars worth of business when it didn't have sufficient hotel rooms next to the convention center. Now, another problem has surfaced.

The convention center has been deemed too small by the port and a third expansion, including another 250-room hotel is being contemplated.

Leaseholders Art Engel and Ray Carpenter, who still would like to develop a Spinnaker-shaped hotel behind the convention center, are trying to work out an accord with the port that would protect their interests and that of the Port District.

As for whether the financing will be there for this and any other hotels that are on the drawing board, it remains an open question.

Hotel consultant and owner Robert Rauch, who attended the PKF seminar, commented earlier this fall that hotel financing had become all but impossible to get.

That was several weeks before the collapse of the markets last month.

Steve Hanover of PKF Capital, another unit of PKF Consulting, also said that hotel lending had basically gone off a cliff even before the missiles of October.

"We've seen 80 percent fewer hospitality transactions (nationwide) this year," Hanover said.

The exact number of hotel transactions in the county wasn't immediately clear, but they do seem to have fallen off significantly in recent months.

Some of the major transactions here within the past year include the 318-room Holiday Inn Hotel Circle in Mission Valley for a reported $43 million or $135,220 per room, the 202-room Quality Suites/Holiday Express Mira Mesa for a reported $23.8 million or $117,822 per room, and the 125-room Residence Inn in Oceanside for a reported $28.75 million or $230,000 per room.

In the meantime, Hanover said he expects more lenders to go under before the shakeout is complete.

Woodworth added that he expects hotel delinquencies to peak during the first quarter of next year.

Hanover said even when hotel investors are able to find financing, it won't be as much as they want and they might not be able to get it at all without enlisting other financial partners. Debt also remains exceedingly difficult to obtain.

Hanover added that not only are lenders gun shy about investing in hotels today, there have been cases in other parts of Southern California where a banks have pulled out during the middle of construction sending the owners scrambling.

As for who might be buying hotels in the future, Woodworth suggested that is difficult to say.

"There are fewer foreign investors," Hanover said, adding they now have their own problems in a worldwide economy gone south.

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