SAN FRANCISCO—Look out, New York. And move over, Hawaii. San Francisco might well be on its way to performance supremacy atop the United States hotel industry, according to sources.
Posting annual double-digit increases in revenue per available room since 2011, according to STR, hotels in the City by the Bay show no signs of slowing down. (STR is parent company of Hotel News Now.)
“We’re in an extraordinary boom market,” said Rick Swig of San Francisco-based hotel advisory RSBA & Associates. “The obvious driver is the tech sector. That’s driven by social media and it’s driven by the whole digital retail sector. We are headquartered in the immediate area or in San Francisco to Twitter, Facebook, Yahoo and Google.”
On top of that is a thriving biotech sector, bustling leisure tourism and a robust convention market, he said.
Such strong, varied demand drivers have positioned San Francisco for sustained growth, unlike the 2000 dot-com bubble that was inflated by hype and speculation, Swig said. He projects double-digit average-daily-rate growth through 2018, barring any major macroeconomic adjustment. Through May year-to-date ADR was up 11% to $191, according to STR.
Joe D’Alessandro, president and CEO of San Francisco Travel, has a similar outlook.
“We don’t see any signs of a downturn in the next three to five years. In fact, it’s just the opposite,” he said.
Fueling D’Alessandro’s optimism is an increase of convention roomnights on the books. For 2014 there are more than 1 million roomnights and 58 events scheduled, up from 850,566 roomnights for 51 events during 2013, according to San Francisco Travel.
Capacity will only increase after a proposed $500-million expansion of the city’s Moscone Center convention and exhibition complex scheduled to break ground by early 2015. The project will add more than 200,000 square feet of contiguous exhibition space.
“That will secure some of San Francisco’s larger conferences which have moved out because of space and configuration issues,” Swig said, who added there might be a deceleration of hotel performance during 2016 given the reduced convention capacity amid the renovation and expansion.
“That’s going to help tremendously,” John LaFortune, GM of the 1,024-room Parc 55 Wyndham San Francisco and area director for Wyndham Hotel Group, said of the Moscone expansion.
The Parc 55 has performed “very well” during 2014, the GM said.
“It’s been great years for the past few and we expect another for 2015,” he said.
“That’s the great thing about San Francisco,” he continued. The city’s demand generators include leisure, business and groups. “We play a little bit in all of that.”
49 square miles
Demand has propelled occupancy to a 3% gain to 80.5% thus far in 2014, according to STR.
“Historically San Francisco has never been able to push the needle far above 80%,” Swig said, but that could soon change as this year’s forecast calls for occupancy of 83%.
“All of the traditional shoulder periods are no longer shoulder periods. There just aren’t any shoulder periods left with the exception of a couple days around Thanksgiving, a couple days around Christmas,” Swig said. “Even the first week of January starts off with a bang.”
With higher occupancies come the ability to push higher rates, he said.
“San Francisco actually is trailing its potential looking at historical metrics in the ADR segment by about probably anywhere between $50 and $75. So although it doesn’t have a lot more growth potential in occupancy, it has significant growth opportunity in ADR,” Swig said.
More stagnant is the pace of supply growth. At approximately 49 square miles and surrounded by water on three sides, San Francisco’s footprint for new development is severely constrained, sources said.
STR counts 312 rooms under construction in the market. By comparison New York has 14,461.
The city easily could absorb 5,000 new rooms, Swig said, but land is difficult to come by and expensive. Other factors—including political mandates calling for more residential units as well as less favorable returns compared to other real estate classes—add further hurdles to hotel development.
Buying a way in
For the past few years, acquisition of existing assets represented a more likely avenue for investors to enter the market, sources said.
During 2013, San Francisco County saw $876 million in transaction activity, up from nearly $750 million during 2012, according to a HVS report.
But deal making already is showing signs of slowing down, Swig said. Most of what was set to change hands already has done so. Now new owners are waiting to reap the returns.
“There are new cost bases,” he said. “The companies currently owning hotels have made significant commitments into recently completed or underway renovations.”
Notable recent trades include:
- LaSalle Hotel Properties acquired the Hotel Vitale for $130 million from Emerald Fund;
- Pebblebrook Hotel Trust acquired the Prescott Hotel for $49 million from Kimpton Hotels & Restaurant Group; and
- Blackstone Group acquired the Hotel Kabuki San Francisco for $44.9 million from 3D Investments.
“There aren’t that many hotels (left to trade), even down through the boutique level,” Swig said.