By Elaine Sahlins and Jaime Law, HVS
SAN FRANCISCO—San Francisco is one of the hottest hotel markets in the country as strong group and leisure demand continues to drive activity, largely through average rate growth, said presenters and panelists at last week’s U.S. Hotel Market Connections that was sponsored by HVS.
While the first quarter of 2013 was softer than the first three months of 2012, firm future convention bookings and robust leisure demand for the rest of the year is expected to keep occupancies at approximately 80%.
Later this summer, the San Francisco market should get a boost as the city hosts America’s Cup sailing races. Additionally, very little new supply is anticipated for the city because San Francisco remains an expensive locale to develop and operate hotels.
Significant demand for residential units and Class A office space is forcing many developers to pursue non-hotel development. These factors point to a continuation of the upward trend in revenue per available room.
Silicon Valley and San Jose are also strong hotel markets where developers continue to search for hotel projects and where land is more affordable for new construction. With a lack of leisure attractions and weekend demand, occupancy and rate in these areas is more constrained than in San Francisco.
Additional development with more diverse hotel demand drivers—such as the 49ers Stadium and the expanded and renovated San Jose Convention Center—are expected to help any absorb new supply. In both San Francisco and Silicon Valley, proposed hotel projects are mostly select-service hotels rather than full-service products, which are difficult to feasibly develop.
A panel discussion at the event reviewed Bay Area hotel sales activity, new construction opportunities and financing trends. From the banking and brokerages perspective, the increasing availability of debt for transactions, low interest rates and solid market demand fundamentals all suggest owners should sell.
However, the market has experienced low transaction volumes since owners generally are looking to hang on to their properties through refinancing opportunities in order to better ride the continued strong operating performance and attain greater appreciation values. Some potential market pitfalls include a longer lending cycle and, in Silicon Valley, the amount of new hotel rooms scheduled to open over the next couple of years.