Due to San Diego�s well-diversified economic base, recently expanded convention center, limited additions to supply, and proximity to major California markets, the local lodging market is well positioned and is anticipated to outperform other major lodging markets in the nation in 2002. Lodging demand is anticipated to remain strong in 2002 and to benefit significantly from the recently completed and expanded convention center. The resort and leisure-oriented hotels are anticipated to further benefit from San Diego�s drive-in market orientation. Overall, lodging market fundamentals are further strengthened by a limited number of supply additions.

Demand Changes

San Diego�s economy is anticipated to benefit from the expansion efforts of several local companies in 2002. Idec Pharmaceuticals is anticipated to construct a new 362,000-square foot manufacturing and R&D plant in Oceanside that will ultimately employ 2,400 individuals by 2003. Texas-based EDS won a $10 billion contract with the U.S. Navy to build and maintain a high-speed Navy and Marine Corps Intranet. As a result, EDS is anticipated to establish a regional center in San Diego and employ 1,500 people. Raytheon, another defense contractor, is anticipated to open a new facility and increase it employment by 680 individuals. Technology firms Siemens AG, Nokia, Qtron, and Sun Microsystems have announced their intent to increase their employment in the area. Additionally, Ford Motor Company recently relocated its alternative-fuel division from Detroit to San Diego, further enhancing the area�s reputation as a technology leader.

Hospitality specific, the $216 million expansion of the San Diego convention center was completed in September 2001. The expansion doubled the size of the facility to 1.8 million square feet, features state-of the-art equipment, and with this expansion, the city is anticipated to be further marketed as a first-tier convention city.

Supply Changes

Due to San Diego�s strong economic and lodging market fundamentals, there is a high degree of interest in hotel development in the area, however, due to capital market constraints, supply additions remain negligible.

Specifically, the downtown market, due the recent expansion of the convention center and the San Diego Padres Ballpark, is considered to be a highly desirable hotel development market. As a result, the Hyatt Regency commenced construction in July 2001 of its 33-story, 750-room addition to its existing 875-room hotel. The two towers will share a common lobby and new 34,000-square feet exhibit hall and 30,000-square foot ballroom. The project is anticipated to be completed in 2003. Construction of the 512-room Westin at the Padres ballpark is anticipated to resume with the stadium construction and to be completed in the first quarter of 2004. The 261-room W Hotel is under construction and is anticipated to open the third quarter of 2003. Further, a 330-room Renaissance Hotel, a 450-room Inter-Continental, and three boutique hotels are in planning stages.

The San Diego Unified Port District has embarked upon a master plan to develop the Campbell Ship Yard and Harbor Island, resulting in two additional hotel development opportunities comprising 1,700 rooms. Further, the California Coastal Commission approved a proposal to redevelop the former Naval Training Center on Point Lona.  Redevelopment of the 279-acre site is anticipated to include two hotel sites with up to 1,000 rooms.  With the passage of Proposition 1A, which allows Nevada-style gaming on Indian tribal lands in California, several gaming-related initiatives are in development. The Barona tribe is constructing the $225 million, 400-room Barona Bay Valley Ranch Resort and Casino. The new casino is anticipated to open in late 2002 or early 2003. The Rincon tribe has commenced construction of a $125 million, 200-room hotel and casino, which is anticipated to open late 2002 and be managed by Harrahs.

Political/Economic/Legal

The San Diego market experienced significant increases in energy costs during 2001 due to deregulation. As a result, the California Public Utilities Commission implemented a stabilization plan for the San Diego area. The plan artificially stabilized energy costs by setting a fixed kilowatt tariff, however, consumers are accruing the differential between market and the fixed tariff. Due to the political considerations, it is not certain if the accrual will be passed along to the consumers directly or through tax and/or bonds measures.

The construction of the San Diego Padres Stadium, a $267 million, 42,000-seat project, remains stalled due to numerous litigation and financial issues. Construction is anticipated to resume in December 2001, however, and to be completed by the 2004 season. A proposed increase in the hotel tax from 10.5 percent to 13.5 percent was announced to subsidize the infrastructure improvements near the ballpark but is facing heavy opposition from the local hotel industry.

Jeff Dallas, Los Angeles
Troy Jones, Los Angeles
Nir Liebling, Los Angeles 

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