By Anwar R. Elgonemy
PKF Consulting – San Francisco
August 1999 - Recently, if you were a hotel owner and your criterion
for success was rate growth, you couldn't have done better than to own
or build a property in the "SFO" market, the area in the immediate vicinity
of San Francisco International Airport.
Between the end of 1996 and mid-1998, the SFO lodging market was the
most buoyant in California and one of the fastest-growing hotel submarkets
in the nation. Its strength was caused primarily by the demand spillover
from high-performing San Francisco to the north and lucrative Silicon Valley
to the south. High-flying corporations in the vicinity, like Oracle
and Genentech, added to the already diversified local economy, which was
fueling demand via business travelers and convention delegates.
However, it appears that the SFO market is currently experiencing a
post-boom market correction. According to PKF Consulting’s Trends
in the Hotel Industry publication, the SFO hotel market’s overall average
daily room rate (ADR) growth rate is flat for the six-month period ending
June 30, 1999 ($117.12 for year-to-date 1999 compared to $117.08 for 1998).
Moreover, occupancy levels declined by 5.4 percentage points, falling from
80.9 percent for year-to-date 1998 down to 75.5 percent during the same
period in 1999. The performance of the overall SFO hotel market over
the five-year period 1994 to 1998 is summarized in the following table,
as well as the projected performance for 1999. Of note is the significant
ADR growth rates experienced in the market between 1996 and 1998, which
are projected to decline in 1999.
Overall SFO Hotel Market
ADR and Occupancy
1994 to 1998 and 1999 (Projected)
|
Year
|
ADR |
Percentage Change |
Occupancy |
Percentage Point Change |
| 1994 |
$69.15 |
- |
75.3% |
- |
| 1995 |
$72.05 |
4.2% |
79.5% |
4.2 |
| 1996 |
$90.16 |
25.1% |
83.4% |
3.9 |
| 1997 |
$106.46 |
18.1% |
84.1% |
0.7 |
| 1998 |
$121.30 |
13.9% |
81.2% |
-2.9 |
| YTD 1998 Ending June 30 |
$117.08 |
- |
80.9% |
- |
| YTD 1999 Ending June 30 |
$117.12 |
0.0% |
75.5% |
-5.4 |
| 1999 (Projected) |
$120.00 |
-1.0% |
75.0% |
-6.2 (1) |
(1) Compared to 1998.
Source: PKF Consulting
Why is this occurring in a market that has so much going for it in terms
of market dynamics? Here are some of the driving forces behind the
SFO hotel market’s post-boom correction:
-
Softening in demand growth: 1999 is a slow year for convention bookings
in San Francisco, thus much lesser demand spillover from the city;
-
Excessive supply: new supply in the SFO market (696 rooms have been added
since 1998, while some 1,100 are planned) and in Silicon Valley (approximately
2,400 new rooms have recently been added), causing a dilution in corporate
demand;
-
Sky-high room rates: SFO market hotels have been charging exorbitant prices
for hotel rooms, causing a disproportionate price/value relationship;
-
Slowdown in business travel as companies become cautious prior to the Millenium,
remaining unsure about Y2K-related issues and the Stock Market in general;
-
Long-lasting impact of the 1998 El Niño weather phenomenon on the
leisure sector;
-
Companies have been leaving San Mateo County to the more affordable East
Bay and Sacramento markets due to steep rents; and
-
The lingering economic crisis in Asia has dampened both leisure and business
travel to San Francisco, shifting demand to cheaper destinations such as
Las Vegas and Los Angeles.
But how long will this market correction last? Probably until mid-2001,
when the $2.4-billion SFO expansion is complete, and the recently added
and planned hotel supply is absorbed by the market. Also, approximately
4 million square feet of commercial office/R&D inventory are projected
to be completed by 2000 in the surrounding area (between Foster City and
South San Francisco), expected to put a downward pressure on commercial
office/R&D rental prices. All variables considered, the SFO hotel
market will once again experience an upward trend in market performance
for the following fundamentals:
-
Strategic location;
-
Active commercial real estate market;
-
By 2001, there will be limited available land for hotel development; and
-
$2.4-billion SFO expansion/new construction.
Anwar Elgonemy is an Associate in the San Francisco office of PKF Consulting,
an international hospitality and real estate advisory services firm. |
