Hotels nearly full, even with S.F.’s high rates
The same dynamic that is driving rents and home prices through the roof in San Francisco — soaring demand coupled with limited new supply — is also driving the price of hotels and hotel rooms into the stratosphere.
If you look at occupancy and room rates, profitability and the prices being paid for hotels, the San Francisco market has never been better, said Tom Callahan, senior managing director with PKF Consulting. Hoteliers say demand is coming from all
sectors — tourists, individual business travelers and convention-goers. And when hotels are busy, “taxis, restaurants, all the businesses around us are busy,” said Jim Gross, general manager of the Sir Francis Drake.
Occupancy rates in the San Francisco metro area, which includes San Mateo and Marin counties, averaged 84.1 percent last year, according to PKF, which specializes in tourism data. The nationwide rate was about 63 percent.
Hotel room rates averaged $208 per night, up 11 percent from 2013. With almost no new hotels opening, PKF expects those rates to rise nearly 10 percent this year, to $228.
The only U.S. metro areas with higher occupancy and room rates last year were New York and Oahu. PKF predicts that San Francisco occupancy this year will hit 84.5 percent, the highest in the nation.
In a deal that closed this month, Loews Hotels & Resorts purchased the 158-room Mandarin Oriental Hotel in San Francisco for $1 million per room, according to Callahan. “That is the highest price paid in San Francisco ever,” he said.
San Francisco’s Ritz-Carlton sold for about $480,000 per room less than two years ago.
Loews would not say what it paid. But Callahan said Loews was willing to pay a premium for the recently renovated Mandarin because it wanted a luxury property in San Francisco that it could own and operate. The Mandarin “was a rare occurrence” because it was unencumbered by a management contract. Replacing the hotel would cost $1.3 million per room, he estimated.
Indeed, developing a new hotel in San Francisco is almost prohibitively expensive. The only big one built since Moscone West opened in 2003 was the 550-room Intercontinental Hotel. It opened in February 2008, just before the industry went into a tailspin.
The only hotels under construction in San Francisco are a 174-room Hampton Inn at 942 Mission St. and a 132-room unnamed property at 144 King St. Ten others, totaling about 1,600 rooms, are in the planning process, but they are mostly smaller ones without meeting facilities and restaurants, according to PKF.
“Nobody is trying to build a major convention hotel because the economics are too daunting,” Callahan said.
Tom Klein, general manager of the Fairmont Hotel in San Francisco, agreed. “From an investor standpoint, building office or residential still provides, in this economic climate, a better short-term return. The cost of doing business in this city is still quite high,” Klein said. And the income generated by an office or apartment building is more predictable than that of a hotel.
Rather than build or buy properties, “a lot of hotels are being refreshed, renovated and repositioned,” said Gross, who is also director of operations for Kimpton Hotels, which owns properties in San Francisco including the Sir Francis Drake. Kimpton is overseeing a $32 million upgrade of the Prescott. By moving up a class, hotels can charge a higher rate.
The total number of hotel rooms in San Francisco is about 34,000. Companies such as Airbnb, which let people rent out rooms or entire homes, have added to lodging supply, but nobody knows by how much. In May, a Chronicle analysis uncovered 4,798 Airbnb listings in the city, but not all of those units were for rent every night. San Francisco Travel estimated that 130,000 people stayed in peerto-peer lodging such as that offered by Airbnb last year.
“Definitely they are competition,” said Jon Handlery, presi- dent and general manager of the 400-room Handlery Hotel.
Hoteliers are looking forward to the Super Bowl in February. Many hotels have blocked out rooms for the National Football League. It has until October to release them.
Hotels generally discount room rates for large conventions, and NFL rates “are similar to other mega events in San Francisco,” said Joe D’Alessandro, CEO of San Francisco Travel, the city’s tourism association. But the NFL rooms have a four-night minimum, whereas conferences generally have no minimum.
It’s on non-NFL rooms where hotels hope to win big. “Our goal is to maximize our revenues during Super Bowl,” said Jonathan Tisch, chairman of Loews Hotels. Tisch was in town for the conversion of the Mandarin to the Loews Regency Hotel, which will become the second in its Regency brand of luxury hotels. Tisch told The Chronicle that Loews would be open to new construction South of Market and “has had some conversations with people who own land.”
Even though the number of visitors to San Francisco and visitor spending hit records last year, hoteliers are not without worries.
The dollar has risen about 27 percent against the euro and 16 percent against the yen over the past year, which makes San Francisco more expensive for foreign visitors.
Handlery said about 60 percent of his business is leisure and 75 percent of that is foreign visitors, who generally book months in advance through tour operators. He hasn’t seen an impact from the dollar yet, “but it’s a concern.”
If occupancy and room rates continue to escalate, San Francisco could have a harder time competing against places like Chicago. “They have a huge supply, and their rates are $70 to $80 less,” Callahan said.
The Moscone Center renovation and expansion, which started in December and is scheduled for completion in fall 2018, could cause some short-term pain. Whenever a convention center is under construction, some conference organizers will say, “Give me a ring when you are done,” Handlery said.
San Francisco Travel is trying to minimize disruption. “There are many groups who are booked during the expansion,” D’Alessandro said. “Some will have minimum impacts; others, we have agreed to stop construction during their events.” The association will not book any more large meetings between now and completion, but hopes to book smaller events.
Most forecasting companies say business will stay strong thanks to the growing business travel and international tourism. “I’m a bit more cautious and believe that it could soften a bit unless we are able to book a large amount of smaller meetings and events,” D’Alessandro said.