Developers Seek More Hotel Rooms
For Hot Area in San Diego

A vacant lot near San Diego's Petco Park was once slated for a sleek 43-story luxury condominium project. Now, as the hotel market continues to strengthen and the residential market cools, the tower's developer, Centurion Partners LLC, is weighing whether to add hotel rooms into the design mix to cash in on the area's strong tourism industry.

The tower's developer isn't the only one impressed by the San Diego region's ability to attract travelers willing to pay some of the country's highest -- and still rising -- hotel rates.

With about 7,733 hotel rooms in the planning, bidding and postbidding phases in the region as of the second quarter, the area's hotel-room pipeline is the country's fifth most-active out of 54 major U.S. markets tracked by Property & Portfolio Research Inc., a Boston real-estate research firm. The Las Vegas market was the most active with nearly 20,000 hotel rooms in the planning, bidding and post-bidding phases, and Phoenix was second with about 10,600 rooms.

The San Diego area's weather, sparkling coastline and chic restaurants have long been a draw for visitors. Still, the city's position as a travel and convention destination has been bolstered by the 2004 opening of Petco Park, home to the San Diego Padres baseball team, a 2001 expansion of the convention center, and other residential and commercial developments that have helped to make downtown San Diego more lively, boosters say. Visitor spending in San Diego County is expected to rise to a record $8.2 billion in the fiscal year ending June, up from $7.8 billion this past fiscal year, according to the San Diego Convention and Visitors Bureau.

The growth is perhaps more remarkable, coming as the San Diego metropolitan area's overall economy has seen a dramatic downshift stemming from its slowing housing, construction and financial sectors. "We are a shining light in an otherwise less rosy picture," says Steven B. Johnson, a spokesman for San Diego Convention Center Corp., which manages the center. Year-over-year job levels in the region rose by just 0.2% in the second quarter, down from an annual average rate of 1.3% from 2002 to 2006, according to Moody's Economy.com. Nationally, year-over-year job levels rose 1.5% in the second quarter, from an annual average rate of 0.9% from 2002 to 2006.

A question on the horizon is how many of the proposed projects will actually be built as the current credit crunch makes it more expensive for many to finance new construction. A good chunk of hotel projects, however, are near delivery and unlikely to be affected. This year alone 10 new or renovated hotels are slated to be completed in San Diego County, according to the visitors bureau. Among the openings: the 420-suite Hard Rock Hotel San Diego is opening its doors this fall.

If all the projects do get built as expected, the San Diego hotel industry could have a different challenge on its hands -- how to fill so many rooms. The answer, according to Mr. Johnson of the San Diego Convention Center, may be to expand the center again. He acknowledges the approach could face opposition given the local economy's downturn, but the center is hoping to find a creative way to fund doubling the size of its meeting space without putting an additional tax burden on residents. "If people can't pay their mortgages, the answer is not to cut off your nose to spite your face, it's to expand the industry to help fund all the city services," says Mr. Johnson.

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