San Francisco Hotels Finally Approaching Recovery
San Francisco hoteliers finally are experiencing a reversal of fortune after some very tough years.
"Demand has come back and is getting stronger," said PKF Consulting CEO Thomas Callahan, who is headquartered in San Francisco. "Rates are coming up, all the tiers are doing well, so the rebound is coming from the top down."
PKF quoted San Francisco's average daily rate at $167 this year, only two dollars short of the city's record-high 2000 average rate. Its occupancy rate also is inching toward 2000 levels, currently at 78 percent.
PKF predicted that by the end of the decade, average daily hotel room rates would be above $200 and occupancy rates would be just a shade under 80 percent.
A tentative labor agreement brokered this month between 13 hotels and more than 4,000 hotel workers in San Francisco is likely to aid the city's hotel industry turnaround, especially for those hotels with ample meeting space. Many meeting planners eschewed San Francisco during the past couple of years due because of labor strife, including a 2004 work stoppage.
Supply growth in San Francisco is at a standstill, with the only new hotel coming on line in the near term being an InterContinental build. "San Francisco has not been an urban development area over the past couple of years," said Bruce Ford, senior vice president of Lodging Econometrics, a Portsmouth, N.H.-based company specializing in U.S. lodging development. Ford added that development would remain stagnant for at least the near term.
Torpid supply growth in San Francisco has given hotel operators a reason to smile, as they can more readily raise rates. While increased rates incite the ire of corporate travel managers, demand remains strong, helping the city shake off the doldrums caused by the industry downturn.
With industry indicators ticking upward, hotel companies are beginning to turn profits. While this money isn't going into new downtown development, it is being put toward renovations and reflaggings, what Mark Everton, general manager of the Hilton San Francisco Financial District, called the "notch-up movement," or renovating and reflagging B-level properties to create A-level properties.
Although the Hilton San Francisco Financial District is not a new build by definition, it is a new building. What once was a Holiday Inn, the property was completely shut down for 10 months—risky for a hotel—and infused with $46 million to reconstitute it from a midpriced Holiday Inn, to a full-service, 550-room Hilton, which reopened its doors only seven months ago.
That renovation is part of a citywide trend of renovation and reflagging. Like the Hilton, the Park Hyatt was reflagged as a Le Meridien, one of only five Starwood hotels branded as such in the United States. Additionally, The Pan Pacific was converted into a JW Marriott and The Argent Hotel soon will become a Westin.
As with many U.S. hotel markets, the outlook for San Francisco remains positive, barring any unforeseen disaster.
Arguably, 9/11 would have been enough to silence any boom market, but in San Francisco, coming on the back end of the now infamous dot-com bubble burst and a subsequent SARS scare, which halted business travel from Asia, what remained was a crippled hotel industry that only now is recovering.
Before catastrophe beset the hotel industry in San Francisco, the city had the second-highest occupancy rates and average daily rates of any city in the United States, according to Lodging Econometrics' Ford. "It's one of the three markets that fell the furthest after 9/11," Ford said, adding that San Francisco joined Boston and Miami.
According to PKF Consulting, San Francisco's 2000 occupancy rate stood at 81.7 percent with an average daily rate of $169.74. Only two years later, the city's occupancy rate dropped to 65.4 percent, coupled with an average daily rate of $146.17.
"Prior to 9/11, San Francisco followed a classic supply and demand curve," said the Hilton San Francisco Financial District's Everton. "As demand would increase beyond the threshold of supply, new hotels would come on board by twos and threes. Then supply would be back up and it would take a few years for demand to match it."