Which Property Sectors Does Tourism Affect?

Part 2 of 2

SAN DIEGO—In Part 1 of this story, GlobeSt.com explored the impact of tourism on San Diego's economy. In Part 2, we speak with experts on the local commercial real estate market exclusively about which property sectors are most affected by tourism and how.

In examining where tourism reaches most significantly, it's hard to overlook the hospitality industry. As we mentioned in Part 1 of this article, both leisure and business visitors spend a considerable amount on hotel rooms. The San Diego Tourism Authority reports that hotel demand increased 7.8% and 3.2% in the second and third quarters of 2014, respectively. While room supply continues to grow, occupancy rates registered 77.9% in the second quarter and 81.7% in the third quarter of 2014.

As GlobeSt.com has also reported, a number of new hotel rooms are being delivered to the San Diego market. According to Peter Willis, CIO of Chatham Lodging Trust, which just purchased a Residence Inn in the Gaslamp Quarter, “A lot of this supply has been from pent-up demand in the pipeline over many years, which is just coming to fruition.”

Meanwhile, some older hotel properties are getting facelifts. As we reported in January, PCCP LLC has provided a $31.2 million senior loan to refinance the 258-room W Hotel San Diego on behalf of a joint venture between Rockpoint Group and SCS Advisors. The new loan allows the ownership to complete its business plan and create additional value, explains Mike Johnson, associate vice president with PCCP. “With a 12% increase in Convention Center attendance from 2013 to 2014, hotel demand is expected to increase in the coming years with the proposed Convention Center expansion and continued market recovery.” 

Relevant to the commercial real estate industry and the hotel industry in particular are the transit occupancy tax and tourism marketing district assessment in San Diego County. If your property is rented out to transients for less than one month, you are responsible for collecting and remitting the TOT assessment to the city in which the property is located. This applies to hotels and motels, vacation rentals, RVs and other similar properties. The SDTA reports that, according to Cities Offices in San Diego, in the fiscal year July 2012 through June 2013, nearly $203 million was collected in TOT revenue in San Diego County. Since fiscal year 1965, $2.8 billion has been collected in the TOT in the City of San Diego, and except for minor blips (and a few major ones during the Great Recession years), the amount collected each year has steadily risen.

“Where does that revenue go?” Bob Prendergast, managing director with Jones Lang LaSalle, tells GlobeSt.com. “Some of it goes to pay for construction of the new convention center, but how is the stadium going to be funded? There is a direct correlation to TOT revenues, where that revenue is going and CRE. It depends where you are getting on the merry-go-round. Hotel rooms can grow because we have a lot of visitors and that money cycles through the economy.”

Retail is the other CRE sector hugely affected by tourism. Craig Killman, EVP with JLL, tells GlobeSt.com., “San Diego's retail vacancy factors in tourist centers are less than 3%. There are roughly 1,200 regional malls in the country, and 17 of them do more than $1 billion in sales—[San Diego's] Fashion Valley Mall is one of them. This is destination shopping, and it has tremendous influence from Mexico and the Europeans who come to San Diego. If you want a retail experience, come to Fashion Valley. Westfield's UTC mall is catching up quickly and could surpass Fashion Valley in the next five years. The retail in the coastal communities like La Jolla, Encinitas and Carlsbad that offer world-class restaurants, great places to stay and fun retail, are a great combination to give tourists and experience.”

Killman adds that new retail environments are coming to San Diego, from Downtown through the beach cities, and development is ramping up all over. “The state bird in California is the quail, but in San Diego you have to rename it the crane because there are so many cranes Downtown.”

Rob Ippolito, director at Cushman & Wakefield Retail Advisors, adds, “Obviously Downtown San Diego is a major retail force that continues to evolve every day. It's capitalizing more and more on those who want to come here and play.”

Pretty much every property sector except for office is affected by tourism, says Prendergast. “Tourism even affects multifamily because that person working at SeaWorld probably doesn't own a house. They don't make the kind of wages to afford a house in San Diego. It does impact our ability retain and grow our companies in one of the least affordable cities in the country, so there's a correlation between tourism and companies moving here.”