Macroeconomic Observations

• The US economy rebounded from a mild recession during the first quarter of 2002; however, macroeconomic indicators weakened in the second quarter and seem to support more of a W-shaped recovery versus a U-shaped recovery period. Major hotel corporations have braced for lower profitability margins for the remainder of 2002.
• Although the US economy experienced a healthy 5.6 percent GDP growth rate in the first quarter of 2002, it increased at a more modest rate of 2.6 percent in the second quarter. Economists anticipate GDP growth to average 3.5 percent in the second-half of the year.
• Last year's tax cuts coupled with the reduction in interest rates and energy prices have helped boost the growth of disposable personal income. With an increase in personal consumption expenditures, consumer spending has increased at a rate of 2.5 percent in the second quarter and is anticipated to increase at a rate of 3.0 percent in the second half of the year.
• The US economy rebounded from a mild recession during the first quarter of 2002; however, macroeconomic indicators weakened in the second quarter and seem to support more of a W-shaped recovery versus a U-shaped recovery period. Major hotel corporations have braced for lower profitability margins for the remainder of 2002.
• Although the US economy experienced a healthy 5.6 percent GDP growth rate in the first quarter of 2002, it increased at a more modest rate of 2.6 percent in the second quarter. Economists anticipate GDP growth to average 3.5 percent in the second-half of the year.
• Last year's tax cuts coupled with the reduction in interest rates and energy prices have helped boost the growth of disposable personal income. With an increase in personal consumption expenditures, consumer spending has increased at a rate of 2.5 percent in the second quarter and is anticipated to increase at a rate of 3.0 percent in the second half of the year.
• Economists anticipate an improvement in the US economy as the unemployment rate begins to stabilize. The unemployment rate increased slightly from 5.6 percent in January to 5.9 percent in June.
• There is a distinct upward trend in the Consumer Confidence Index as it edged up 8.5 points from 97.8 in January to 106.3 in June. However, the recent volatility in the stock market, which has declined by approximately 20 percent in two months, has contributed to a 9.2 point decrease in the Consumer Confidence Index in July.
• Economists anticipate an improvement in the US economy as the unemployment rate begins to stabilize. The unemployment rate increased slightly from 5.6 percent in January to 5.9 percent in June.
• There is a distinct upward trend in the Consumer Confidence Index as it edged up 8.5 points from 97.8 in January to 106.3 in June. However, the recent volatility in the stock market, which has declined by approximately 20 percent in two months, has contributed to a 9.2 point decrease in the Consumer Confidence Index in July.

• The US lodging industry continues to perform below last year's levels due to lower corporate demand, a slow recovery in international travel, and influx of new supply in selected markets; nevertheless, profitability margins have been moderately held due to improved operating efficiencies at the property level.
• In 2001, the US Lodging Industry experienced a 4.7 percent decrease in hotel room revenue. In 2002, the US Lodging Industry will continue to face the repercussions of last year's events as it anticipates an additional 0.7 percent decrease in hotel room revenue.
• Airline travel declined by 6.9 percent in 2001 and it is estimated to continue to decline by 4.7 percent in 2002. However, the FAA anticipates total air-travel to increase 12.5 percent in 2003.
• According to the Travel Industry Association of America, car travel will increase by 3.0 percent, which may help lessen the impacts of decreased domestic airline travel in California; however, the volatility in gas prices may impair drive-in demand and result in losses of room sales for the US lodging industry during the busy summer months.
• The US lodging industry continues to perform below last year's levels due to lower corporate demand, a slow recovery in international travel, and influx of new supply in selected markets; nevertheless, profitability margins have been moderately held due to improved operating efficiencies at the property level.
• In 2001, the US Lodging Industry experienced a 4.7 percent decrease in hotel room revenue. In 2002, the US Lodging Industry will continue to face the repercussions of last year's events as it anticipates an additional 0.7 percent decrease in hotel room revenue.
• Airline travel declined by 6.9 percent in 2001 and it is estimated to continue to decline by 4.7 percent in 2002. However, the FAA anticipates total air-travel to increase 12.5 percent in 2003.
• According to the Travel Industry Association of America, car travel will increase by 3.0 percent, which may help lessen the impacts of decreased domestic airline travel in California; however, the volatility in gas prices may impair drive-in demand and result in losses of room sales for the US lodging industry during the busy summer months.

• California's lodging market continues to perform below prior year's levels; however, select markets with significant drive-in demand base such as San Diego and Orange County, have demonstrated the diversity and resilience of the California lodging sector.
• The repercussions of last year are anticipated to continue to be felt as the California Travel and Tourism Commission forecasts summer business travel and leisure travel rates to be down by 10.8 percent and 4.4 percent, respectively.
• An estimated 86.8 million tourists are anticipated to visit California this summer, but estimates indicate visitation numbers could be 5.4 percent below 2001 figures. Furthermore, officials at California Tourism, a state agency, anticipate a decline in summer travel by 5.0 percent which equates to approximately $4 billion less in summer tourist spending.
• A supply growth of 3.0 percent in luxury beachfront resorts along the Southern California coast hopes to strengthen tourism. The new resorts are anticipated to rely upon conventions and meetings to boost soft weekday occupancies.
• California's unemployment rate fell to 6.3 percent in May, indicating a slight improvement in the state's economy. Los Angeles' unemployment rate declined to 6.3 percent while the Bay Area's stabilized at 5.6 percent.
• California's lodging market continues to perform below prior year's levels; however, select markets with significant drive-in demand base such as San Diego and Orange County, have demonstrated the diversity and resilience of the California lodging sector.
• The repercussions of last year are anticipated to continue to be felt as the California Travel and Tourism Commission forecasts summer business travel and leisure travel rates to be down by 10.8 percent and 4.4 percent, respectively.
• An estimated 86.8 million tourists are anticipated to visit California this summer, but estimates indicate visitation numbers could be 5.4 percent below 2001 figures. Furthermore, officials at California Tourism, a state agency, anticipate a decline in summer travel by 5.0 percent which equates to approximately $4 billion less in summer tourist spending.
• A supply growth of 3.0 percent in luxury beachfront resorts along the Southern California coast hopes to strengthen tourism. The new resorts are anticipated to rely upon conventions and meetings to boost soft weekday occupancies.
• California's unemployment rate fell to 6.3 percent in May, indicating a slight improvement in the state's economy. Los Angeles' unemployment rate declined to 6.3 percent while the Bay Area's stabilized at 5.6 percent. 

1. Summer time and the Golden State - The volume of this year's leisure and group-related summer travel should provide California's lodging operators with an indication of overall 2002 lodging performance. The summer months have traditionally been a challenging period for California's lodging operators as corporate lodging demand retracts and the competition for the leisure traveler heats up across the nation. This current summer-season, however, California's major lodging markets should experience an increase in leisure travel due to continued weakness in air-travel. The continued weakness in air-travel is suggesting that California is poised to enjoy a captive demand audience as consumers are anticipated to drive rather than fly to their leisure destination of choice. The prolonged economic recovery is negatively impacting consumer confidence and is anticipated to increase price sensitivity amongst leisure travelers. This price sensitivity should enable California's lodging demand generators to position themselves as the destination of choice for California's and surrounding states residents. Primary Impact: Occupancy

2. The International Factor - The recovery pace of international tourism to California is anticipated to play a significant role in overall lodging performance given the international travelers' greater spending propensity. In 1999 and 2000, international visitors to California accounted for approximately 3.5 percent of total visitors while contributing approximately 15 percent of total spending. Thus far, international travel is lagging 2001 levels as May year-to-date Los Angeles International Airport and San Francisco International Airports international passenger traffic trails by 15.8 percent and 9.0 percent, respectively. The declines in international travel have translated into losses in the lodging industry as the lucrative international travelers help drive up average daily rates. Barring any unforeseen political events, international travel is anticipated to recover throughout the remaining 2002 period as the Asian economies continue to recover and consumer air-travel confidence strengthens. Primary Impact: Average Daily Rate

3. Corporate Spending - As the summer months come to a close, corporate travel spending is anticipated to reemerge as the key indicator for California's lodging 2002 performance. California�s lodging performance levels declined noticeably in the first quarter of 2001 as corporations began to retract travel-related spending. This trend was apparent throughout California's lodging markets but particularly apparent in San Francisco as tech-related corporate travel spending came to a virtual standstill. Given the prolonged economic recovery pace, corporate travel spending is not anticipated to return to its 2000 levels in the short-term (4-6 months), however, corporate demand should begin to revive particularly in the fourth quarter of 2002 as corporations re-evaluate their travel budgets in light of improving business conditions. Primary Impact: Average Daily Rate

4. Lack of New Supply - California's stringent development ordinances in key lodging demand areas such as along the coastline (Santa Barbara, Monterey, Carmel) as well as lack of available land in metropolitan hubs such as Los Angeles and San Francisco, increase barriers to entry of new lodging competitors and ensure that existing players enjoy a significant upside when lodging demand rebounds. Given that 2002 performance is anticipated to improve compared to 2001 levels, lodging operators at key California markets should brace for a significant improvement in performance levels in the latter half of the year. Primary Impact: Occupancy

5. Insurance and Cost Reductions - California's lodging operators are anticipated to continue to operate at lower business volumes throughout 2002 and will be challenged to meet profitability forecasts. California's June year-to-date occupancy, ADR and RevPAR performed at 7.1 percent, 6.8 percent, and 13.4 percent, respectively, below prior year's levels. Given the prolonged economic recovery period, operators should focus on improving current processes and avoid resorting to one-time cost reductions aimed at meeting short-term financial goals. Process improvement areas include but are not limited to streamlining purchasing procedures, cross-utilizing staff across different departments, and outsourcing unprofitable supporting departments. However, the recent increases in insurance premiums may offset the positive cost reduction impacts upon profitability. Primary Impact: Profitability

6. Price Discounting - Price discounting is anticipated to moderate California's 2002 lodging performance particularly in the fourth quarter should lodging operators realize they are unable to meet financial forecasts. Although price discounting is anticipated to stimulate demand across all segments, profitability is likely to suffer.
Primary Impact: Average Daily Rate

7. The Return of the Capital Markets - In 2001 the volume of capital market transactions declined significantly as potential buyers, hoping to capitalize on short-term market conditions, unsuccessfully sought deals at bargain prices, while sellers were hoping to receive a substantial premium for their assets. The difference in the buyer seller expectation coupled with the uncertainty surrounding the US lodging industry has left the lodging capital markets at a virtual standstill. However, given the anticipated economic recovery and somewhat restored confidence in the US lodging industry, capital market transactions are beginning to reemerge. This trend is anticipated to continue throughout the remainder of 2002, and play a role in the sustained recovery of the US lodging recovery pace. Primary Impact: Loan to Value Ratio

8. Stock Market - Since the stock market peak, approximately $7 trillion in portfolio wealth has disappeared. Economists indicate that a 20 percent decline in stock market value may translate to a one percent or $70 to $80 billion decline in consumption. In 2001, refinancing saved $100 billion in household incomes and is anticipated to save $50 billion in 2002; therefore, the current surge in mortgage refinancing, a result of low interest rates, may offset the negative effects of the stock market. As the increased refinancing activity has softened the effects of the economic downturn, consumers continue to remain optimistic. In a survey conducted by Yesawich, Pepperdine & Brown, consumers indicated that they would maintain a strong travel outlook despite the most recent declines in the stock market. Primary Impact: Lodging Market Capitalization

9. Indian Gaming - In 1999, Proposition 1A recognized the legal right of Indian tribes to operate casinos in California. Passage of the proposition has led to significant growth and expansion of the Indian gaming industry as the number of Indian casinos in California is anticipated to double by 2004 to 100 casinos. Since 1999, many major casino operators such as Harrah's and Trump Hotels & Casino Resorts (THCR) have formed partnerships with tribal gaming. In April, THCR formed an agreement with the Twenty-Nine Palms Band of Luiseno Mission Indians to manage the renamed, Trump 29 Casino in Coachella Valley while Harrah's partnered with the Rincon San Luiseno Band of Mission Indians to operate Harrah's Rincon Casino & Resort in San Diego, which opened in August. Primary Impact: New Demand Sources

10. Airline Industry - The events of September 11 th have continued to impact the airline industry, resulting in losses of $1.4 billion for the quarter ending June 30. Major carriers such as United Airlines are still struggling with decreased demand and high operating costs as losses totaled $341 million in the second quarter. In an effort to boost lagging demand, major airlines are steeply discounting leisure fares even during the typically lucrative summer months. The recent chapter 11 filing of US Airways may also translate to lower fares for passengers. The fare reductions are anticipated to not only further induce leisure demand for airlines, but also help increase room demand throughout the lodging industry. Primary Impact: Occupancy

Los Angeles Lodging Market Analysis 
 

• According to City economists, the local economy is anticipated to lose approximately $2 billion in tourism revenue and approximately $71 million in travel-related taxes until tourism recovers. However, Los Angeles has implemented several travel campaigns targeted at increasing tourist spending while many hotels are offering packages to capitalize upon the leisure segment. A $300,000 campaign in Los Angeles is accredited to generating approximately $3.7 million in visitor spending including $1 million in hotel room revenues.
• Growth in rooms supply in Los Angeles in 2001 was limited due to the difficulty in obtaining financing, a decrease in lodging demand and growing economic uncertainty; however, the lack of supply growth has softened the effects of the slowdown. In addition, major new developments in Los Angeles - including TrizecHahn's Hollywood and Highland project, the Disney Concert Hall, and the second phase of the Staples Convention Center - are anticipated to support lodging demand in the Los Angeles area.
• Los Angeles International Airport (LAX) continues to experience decreased passenger volumes due to the events of September 11th as domestic and international traffic trail last year's performance by 17.5 percent and 15.8 percent, respectively. As the top US destination for Japanese tourists, Los Angeles has suffered from the significant decline in international travel, losing approximately $108 million in Japanese visitor spending alone. To help boost lagging tourism, US and Japan signed a bilateral agreement in April that would establish a tourism expansion program to increase the number of tourist by 20 percent in the next five years.
• The Los Angeles Convention Center (LACC) experienced approximately nine cancellations as a direct result of September 11th , exacerbating Los Angeles' already languid convention business. The LACC currently operates at a 73.3 percent capacity, reflecting a 4.3 percentage point decline in comparison to last year. However, two recent conventions have positively impacted Los Angeles; the E3 convention in May contributed approximately 27,000 affiliated room-nights to the area and the Microsoft Fusion convention in July had an estimated economic impact of $6.5 million for Los Angeles.
• The recent focus on increased spending for national defense and homeland security, and Northrop Grumman Corporation's $7.8 billion purchase of TRW Inc. are anticipated to improve growth prospects throughout Los Angeles and Southern California. The increase in defense spending and acquisition will potentially drive job growth in the area and help revive the lagging business travel in Los Angeles.

• San Francisco has been particularly hard hit by the economic downturn and dot-com implosion that have caused a wave of bankruptcies and tech-layoffs. Unemployment increased from 3.3 percent in May 2001 to 5.8 percent in May 2002. Many San Francisco based corporations have suffered heavy losses as a result of the tech slump, evident from the demise of the investment bank, Robertson Stephens.
• San Francisco's airline dependent tourism market continues to be impacted by the events of September 11th. May year-to-date domestic and international passenger traffic at San Francisco International Airport have declined 19.8 percent and 9.0 percent, respectively. International visitors, especially lucrative Japanese tourists, have been slow to return; however, the San Francisco Convention and Visitors Bureau anticipate an increase in European tourist in late 2002 to supplement the decline in Asiantravel. San Francisco's greater reliance on the fly-in market than the drive-in market is anticipated to directly impact the recovery pace of lodging demand as a result of the lagging air travel volume.
• The SFCVB anticipates approximately 15.5 million visitors in 2002 reflecting a ten percent decline from last year as April year-to-date occupancy rates lag by approximately 13 percent. Many hotels throughout San Francisco are offering summer discounts in order to induce demand from the leisure segment to help boost languid occupancy rates.
• Although the Moscone Convention Center experienced cancellations immediately following the events of September 11th , attendance outlooks for the second half of 2002 remain positive. Major upcoming events include the International Automobile Show and The Summer International Gift Fair with anticipated attendance of 300,000 and 40,000, respectively. In addition, the spring 2003 opening of Moscone West, which will increase the center's exhibition space by approximately 300,000 square feet, is anticipated to boost the number of city-wide events and affiliated room-nights throughout the metropolitan area.
• The office market in San Francisco weakened considerably due to the technology-bust and the national recession. San Francisco's overall vacancy rate increased significantly from 1.4 percent in 2000 to 15.6 percent in the first quarter of 2002 as many corporations have relocated to the East Bay. The ailing office market and economic downturn have also impacted business travelers as they continue to lag in San Francisco with corporate travel budgets remaining weak. In 2001, the number of business travelers decreased by approximately 25 percent.

• Although currently handling five percent fewer visitors than last year, San Diego's lodging recovery pace remains significantly faster than other California submarkets. A $1 million Rediscover San Diego campaign helped boost occupancy rates from approximately 70 percent to 75 percent this year. San Diego's North County resort community is benefiting from the increased drive in demand from Los Angeles, Orange County and Arizona. Drive in demand has been a significant factor in San Diego's recovery pace by offsetting cancellations from large business groups.
• Since the $216 million expansion of the San Diego Convention Center (SDCC) that has approximately doubled its size to 1.7 million square feet, outlooks have been bright as the convention center anticipates total number of events to increase significantly. This summer the SDCC will host approximately 18 conventions and trade shows which will equate to a regional economic impact of $234 million, reflecting a 57 percent increase over the same period last year. Major conventions this summer, which include the Environmental Systems Research Institute, American Society for Microbiology and National Safety Council, will help boost average room rate and occupancy throughout the San Diego area.
• San Diego's biotechnology industry continues to gain headway as major firms undergo large expansion plans. Pfizer began its 800,000 square feet expansion in Torrey Pines in May while Idec Pharmaceauticals anticipates construction on a new drug manufacturing campus on 60 acres in Oceanside. The new campus will employ more than 2,000 people. However, a recently proposed bill (SB 1444) may limit growth of smaller firms throughout the biotechnology industry by imposing stringent guidelines on biotechnology use of radioactive materials.
• Southern California's coastal region is anticipated to experience a three percent increase in luxury resorts despite the continued uncertainty in the economy. While questions remain whether the market can absorb the new supply, state tourism officials hope to emphasize the area in future promotional travel campaigns as the "new riviera" to help boost occupancy. New resorts such as The Lodge at Torrey Pines and Marriott Del Mar in San Diego County are anticipated to rely upon the drive in market from Southern California.

• Although Anaheim and Orange County's lodging markets continue to trail last year's performance, the recent ieObjects In Orange County are Closer Than You Thinklc ad campaign helped boost iodrive-inl, demand and affiliated room nights throughout the area. County officials anticipate a five percent increase in occupancy this summer as tourism recovery outlook remains positive.
• Although the Anaheim Convention Center (ACC) experienced cancellations immediately following September 11th, the convention center began the year with an unprecedented 65,000 attendees for the National Association of Music Merchants. Through March, Anaheim and Orange County hosted 245 groups with an estimated attendance of 460,000, reflecting an economic impact of $600 million for the region. Representatives of the ACC remain optimistic with approximately 17 events booked through September 2002. Major conventions this summer include WESCON and California Cable Television with anticipated attendance of 30,000 and 32,000, respectively.
• A surge of coastal luxury resorts has surfaced along Southern California. By next summer, San Diego and Orange County's lodging supply is anticipated to increase by 4,200 rooms. Although uncertainty remains whether the market can absorb the new supply, the resorts currently under construction, such as the Montage Resort and Hyatt Regency Huntington Beach Resort & Spa with 53,000 square feet of meeting space, will depend on conventions and meetings to boost occupancy. Many hotels such as the Inn at Laguna and Surf & Sand Resort are also undergoing renovations in order to stay competitive among the new supply. The influx of luxury resorts may initially negatively impact ADR; however, in the long run, the new supply is anticipated to help establish Southern California as a premier beach resort market.
• While Disneyland appears close to recovery after last year's 11 percent decline in park attendance, Disney's California Adventures (DCA) continues to struggle with lackluster results. Since the park's opening in February of 2001, park attendance has fallen short of projections by approximately 29 percent at 5 million, according to published sources. To help boost the lagging attendance, DCA will promote a 16 band concert series called "Disney's Rockin the Bay" featuring bands such as the Beach Boys.
• The federal government announced plans for an expansive urban development at the abandoned El Toro Marine base in Orange County. Approximately 4,000 acres of the base will embody the City of Irvine's vision for a "Great Park". The park is anticipated to include museum space, nature preserves, golf courses, and a university campus. The remaining 700 acres will include 3,400 new homes and 2.9 million square feet of retail, office and commercial space. The site will be developed over the next ten years while parts will be open in 2005.