New InterContinental Can't Ease San Francisco Supply Crunch

Intense convention demand and limited supply—even after the opening of a new $200 million, 550-room InterContinental hotel—should keep San Francisco's hotel room rates high throughout 2008.

"The San Francisco hotel market is extremely strong, with an occupancy of 78 percent in 2007," said Thomas Callahan, CEO-West of PKF Consulting's San Francisco operations. "That is expected to continue this year, compared with a national average of 63 percent. Room rates should rise 7 percent to 8 percent because of a shift in the demand mix that will result in a strong convention calendar, bringing 925,000 attendees to town in 2008."

While the city's hotel market is all about volume, he added, and somewhat dependent on the economy, not even a recession will impact it that much because of the high demand.

"If a recession happens, some business might not come, but so much will come that it's still going to be a banner year for San Francisco's hotels," Callahan predicted.

The city's ADR was double the rate of inflation, another indicator of a very strong hotel market, as is occupancy anywhere above 75 percent, said Jan Freitag, vice president of Smith Travel Research of Nashville, Tenn. "Since 2003, we've been seeing a strong increase in demand every year which, at the same time, was not matched by an increase in new hotel rooms. In fact, 2006 was the first year recently that new supply went up slightly," he said.

Supply remains limited—there are 33,000 hotel rooms in the city—so hotels will be in "compression mode," Callahan said, and will have control in business travel negotiating. "If you're a big vendor, such as Wells Fargo here in San Francisco, you can get a better rate," he said.

His advice to others is to try to "negotiate a bit farther out and gaze a bit more intently into that crystal ball."

Rates are high at San Francisco's hotels because so few have opened for so long that when one does open—the city's second InterContinental opened in February—"it acts to fill in demand from last year and previous years without doing much to meet current demand," said Marc Casto, president and COO of Santa Clara, Calif.-based Casto Travel.

When it comes to negotiated rates for his clients, Casto is finding that the tone at hotels is the same as it was last year. "With rates headed up again, hoteliers can afford to simply sit back and wait. Now they want 200 room nights, when before it was only 150," he said. Business travel to San Francisco is heavily bio-tech and high-tech, he said.

The new InterContinental will not lower rates, in terms of business travel negotiating—"not this year, at least"—because of its minimal effect on supply and because travel to San Francisco hasn't been affected by the credit crunch that hit other parts of the country, Casto said.

"It's a very, very healthy market on a price par with New York's, but with less availability," he said.

Tanya Houseman, public relations manager for the San Francisco Convention & Visitors Bureau, concurred that the effect of the new InterContinental would be limited.

"It's not going to add a huge impact, although it will be a great addition, in a great location, to the hotel mix. It's the only new hotel opening in the foreseeable future," she said.

In terms of new hotels, San Francisco is "sort of a static town," Callahan said. "The new hotel's 550 rooms will be absorbed quickly into the mix, so there won't be much of an impact on the market, with no negative impact on high rates."

In its first year, the new InterContinental, which has 43,000 square feet of meeting space, a spa, a swimming pool and a street-level restaurant and bar in an L-shape, wrapping around the corner of Fifth and Howard Sts., will have an occupancy rate between 70 percent and 80 percent, Callahan said.

Among trends affecting the San Francisco hotel market are a moratorium on condominium development as part of hotels with more than 100 rooms, and a number remodelings. "The moratorium is in place to protect hotel supply and the hotel occupancy tax," Callahan said. In lodging's good economic environment, he said, it doesn't make sense for hotels to go the condo San Francisco route, although Casto said it's a smart way for hotels to recoup their investment.

"Basically, we expect to see zero condo growth because that window has closed," Callahan said.

Many San Francisco hotels are remodeling, he said.

"Following the downturn from 2001 and until 2004, hotels made a comeback beginning in 2005 and 2006 and now have the money to remodel and renovate," Callahan said.

Some of the hotels redone recently are the 380-room InterContinental Mark Hopkins San Francisco, the 410-room W San Francisco and 529-room Sheraton at Fisherman's Wharf.

Renovation of the Hilton San Francisco is scheduled to be completed in April 2008, while a remodel of the 393-room Stanford Court, A Renaissance Hotel is set for completion in mid-2008.