Hotels Opening, Renovating In Hard Hit San Fran Market

Given the severe setbacks the San Francisco market has experienced as a business travel destination since the economic downturn began in 2001, the openings of the Kimpton Group's Argonaut Hotel in August and, down the road, Starwood Hotels & Resorts Worldwide's St. Regis next year, are a mixed blessing. On one hand, they represent additional supply in a market coping with depressed demand. On the other hand, a hotel market always needs a stream of new inventory to remain vital and competitive.

In addition, Joie de Vivre Hospitality, a local hotel company, next month plans to unveil a top-to-bottom renovation of The Shannon Court, which has been renamed Hotel Adagio.

While other top U.S. business travel destinations have suffered from the weak economy, San Francisco had the unfortunate distinction of having a second challenge to overcome: the failure of the high-tech boom, which was centered in nearby Silicon Valley.

Yet, few industry experts deny the city's long-term viability as both an individual business travel and meetings destination, not to mention its appeal to leisure travelers. "San Francisco always will be one of the world's most engaging hotel markets," said Anwar Elgonemy, an analyst with Jones Lang LaSalle Hotels. Elgonemy noted that convention hotels comprise approximately one-third of the city's room inventory and dominate the local market. "By contrast, the luxury hotel segment has the lowest share of product, but boasts the highest barriers to entry."

Indicative of how badly the local market has suffered, San Francisco hotels in 2002 lost 32 percent of their valuation. "This was on top of a 37 percent drop in 2001," said Stephen Rushmore, president of HVS International, a firm that tracks hotel value. "Of the top 10 most expensive U.S. cities, San Francisco had the steepest percentage change in value."

On a per room basis, furthermore, San Francisco hotels lost $175,000 in value between 2001 and 2002, the steepest decline of any city. By comparison, Miami hotels lost $34,000 in value per room during those two years, while Dallas hotels lost $39,000 per room, according to HVS.

Rushmore also noted that it will take San Francisco five more years for its hotel properties to regain the value they had in the banner year of 2000. In this regard, it will take such cities as New York, Chicago and Boston a comparable amount of time to recapture their 2000 values.

The 252-room Argonaut, located in Fisherman's Wharf, is a renovation of a 1907-era cannery warehouse into a hotel. Original touches, including steel doors, exposed brick walls and porthole windows, were incorporated into the design. When first built, the building was directly on the waterfront, which explains the portholes. While Fisherman's Wharf is primarily a leisure destination in the city, it's in easy access to the downtown business district.

The 275-room St. Regis Museum Tower is being built in the emerging South of Market neighborhood. "Our intention has been to create a luxury presence in the international gateway cities and we count San Francisco among that select group," said Atef Mankarios, president of the brand. "For business travelers, this translates into a high enough level of personalized service to allow them to operate at peak productivity while they're our guests."

Like the Four Seasons San Francisco, which opened in late-2001, also in the South of Market area, the St. Regis is part of a mixed use development that includes high-end condominium apartments. The hotel originally was scheduled to open this year.

At Joie de Vivre, the transformation of The Shannon Court into the 171-room Adagio follows the completion of a more modest renovation of the 94-room Hotel Rex, which was completed in April. Like the Adagio, the Rex is located in the Union Square district.

Joie de Vivre has carved out a reputation in recent years as a local operator of small-scale, boutique hotels and restaurants. CEO Chip Conley's stated intention is to create "the most diverse collection of lodging experiences in the Bay Area." To this end, one of the company's 23 hotels is an upscale campground.

For established business hotels in the market, transient travel has suffered more severe declines than group travel. Consequently, one of the strategies has been to shift the focus to booking meetings. Regional meetings in particular have been a focus as cost-conscious planners seek sites closer to their headquarters. Even more appealing to these planners is the savings in airfare, if attendees can drive to the site.

"We've actively pursued small corporate meetings, typically of up to 50 people, which now probably account for 50 percent of our business," said Stan Bromley, regional vice president and general manager of the 277-room Four Seasons. A typical meeting might be a board of directors or executive committee meeting. Original projections, completed before the market downturn, called for meetings to account for 10 percent to 15 percent of bookings.

Likewise, the 362-room Omni San Francisco, which opened in early-2002 in the financial district at the corner of California & Montgomery streets, adjusted its transient/group projections to 65 percent transient/35 percent group bookings. "Operationally, it's meant relying on the flexibility of our 12,000 square feet of meeting space and trying to come up with creative solutions for our clients," said general manager Michael Casey.

Citywide conventions have become a newly found opportunity for these properties, even though they are not convention hotels in themselves. "When there's a citywide underway, we'll benefit from allied businesses that are here to do business while the citywide is in town," Bromley said.

As in other markets, the booking window on this group business has grown quite narrow. "We're picking up more meetings on a short-term basis than ever before," said Geraldine Korss, director of sales and marketing at the 330-room Pan Pacific San Francisco on Post Street, near Union Square. "Meanwhile, the booking window for transient travel, already narrow, has become even narrower. In fact, transient bookings are strongest four to seven days out."

In the present economy, a hotel such as the Omni has added incentive to participate in a citywide convention's room block. "But it would be customers who have no meeting space needs," Casey said. "They're meeting at the convention center and staying here."

Another focus for hotels has become the incentives market. "We've partnered on these projects with deluxe hotels that aren't even our brand in desirable nearby destinations, such as Carmel or Napa," Bromley said. "We then have approached incentive travel planners as well as the big incentive houses and proposed a package: Incentive participants get to spend a few nights at the Four Seasons in San Francisco and then either go up to stay a few nights in Napa at hotel X or down to Carmel to stay at hotel Y. Participants get to experience two different types of California destinations on a single trip."

Having weathered the downturn of the past two years, San Francisco hoteliers, while circumspect, expressed cautious optimism moving forward. "What we lost in the dot-com collapse would be the equivalent of New York losing the financial services business or Los Angeles losing the entertainment industry," Bromley said, "but we've survived and are finding our own way to be successful."