Downtown San Diego on the Brink of a Hotel Oversupply

Downtown San Diego could be on the brink of a hotel room oversupply problem. The plan to expand the San Diego Convention Center fueled hotel development activity, but now that the project has stalled, 2,500 hotel rooms will be delivered to the market with no new demand to fill them. Hotel activity has been strong in the San Diego market, but this new supply could stagnate growth in the Downtown submarket. In a downturn, it could mean worse.

“If we don’t expand the convention center, we will have 2,500 more hotel rooms Downtown, and we will have no additional convention demand because the convention demand is maxed out,” Bob Rauch, CEO and founder of RAR Hospitality, tells GlobeSt.com. “There will be more supply and the demand will be somewhat flat. So, hotels will have to seek new demand generators until the convention center is expanded. I think that they will be fine, but I think that it will force them to compete with other submarkets in San Diego for groups that they previously did not want, like sports teams and discount conventions, which have typically gone to Mission Valley.”

Next year, Rauch expects rates to drive RevPAR growth, because occupancy rates have reached 80%, which is a peak for the hotel market. However, with new hotel deliveries, rates could be more difficult to increase. “When supply increase considerably and demand does not, not only does occupancy drops but it also makes rates much more difficult to increase,” he explains.

Most developers and hotel investors expected the expansion of the Convention Center, and launched development projects based on the promise of the project. “Almost everyone thought that when the unions and the hotels agree on a convention center expansion, then it will get done,” says Rauch. “I am not privy to all of the reasons why, but the signature did not get verified and it did not get on the ballot. If it had, I think it would have passed. Then, we would have a center that is opening when all of these hotels open. It is a scenario that fell apart.”

Now, hotel operators in Downtown San Diego will need to look for new demand sources either within or outside of the market. “Without the convention center expansion, it would require either new corporations to open office Downtown, which they have not done in any sort of abundance, or more leisure travel, which would take away from other submarkets,” explains Rauch.

Demand from the Chinese travel market could help to fill these room; however, San Diego doesn’t currently have a direct flight from Beijing. Rauch sees this as an easy way to boost leisure travel and hotel demand in San Diego. “One of the things that we could do is to dramatically increase our China play, and that would be getting a deal done for a daily direct flight from Beijing,” says Rauch. “If we could get direct air from China, we would do really well. TJ or LAX, Las Vegas. These are foreign-independent travelers, meaning that they book their own tours, and decide how long they are going to stay in the market.”