This forecast marks the first report issued by the new Center for Hospitality and Tourism Research (CHTR) at San Diego State University (SDSU). The report provides public and private sector travel industry decision-makers with a composite resource on data and trends in the San Diego lodging industry. The data used for the 2003 San Diego County Lodging Industry Forecast was compiled by Smith Travel Research (STR), the nationally-recognized leader in tourism industry research, and analyzed by the CHTR.  Statistics also were gathered from the San Diego Convention & Visitors Bureau, CIC Research, and other credible sources.

U.S. Economy
The U.S. economy has been in a recession over the past year and a half. When the U.S.  economy was in a recession in the early 1990s, the hotel sector was hit very hard.  Symptoms of the hotel industry decline included flat to lower average rates, dramatically lower occupancy levels (fueled by aggressive construction), high foreclosure rates and significant capital depreciation.

Blue Chip Consensus forecasts indicate a 3 percent growth rate for real GDP during 2003 versus 2.6% for 2002. Typically, the tourism industry recovery lags general economic growth by six months. Based on this information, revenue per available room (RevPar) growth should resume at historical levels by 2004. During the current period of economic instability, the hotel sector has performed relatively well. Much of the difference is the lack of new hotel supply; however, additional significant differences include low loan leverage, a strong banking system and much lower interest rates.  The sluggish economy, the prospects of war with Iraq, and �long lasting imprints of the September 11 events on the big family vacation plans typically taking place in July and August, have prevented the market from clearly turning around,� according to Torto Wheaton Research.

The U.S. economy appears likely to sputter throughout the first half of 2003, with more layoffs and fewer new jobs in store, according to The Anderson Forecast released December 5, 2002, by the University of California Los Angeles. The forecast predicts the national economy will experience sluggishness and a disappointing labor market until mid-2003, when business spending will finally begin to pick up.

U.S. Lodging Market
This past year must be put into perspective. The industry lost billions of dollars annually just 10 years ago. While business travel is down, meetings are back strong and consumer confidence is hanging in there, giving the leisure market momentum. It is crucial to keep a watchful eye on energy costs as well as other factors, like airfare rate hikes and general economic growth, as they have a direct impact on the hospitality industry�s performance.  The markets that are likely to show strength are those that cater to the regional drive-in markets.

Nationally, the occupancy for 2002 should finish the year at just under 60 percent at an average room rate of $83. The occupancy is down two percent from 2001 while the rate is down three percent from last year. Through the first 10 months of the year, only New York, Oahu and San Diego are over 70 percent occupancy. New York lost nine percent in average rate while Oahu lost six percent. San Diego is down less than one percent in average rate this year.

UBS Warburg expects total U.S. lodging room revenues (the change in demand and room rates) to increase 2.0 percent in 2003. Subtracting their U.S. room supply growth estimate of 1.2 percent from this estimate, results in a 2003 U.S. RevPAR growth forecast of just under one percent.

To add some international perspective, the highest major city occupancy through October of this year is Tokyo at 79.5 percent while the lowest is Jerusalem at 32.4 percent, according to the HotelBenchmark Survey by Deloitte & Touche. Generally, Asia and Europe are strong while Latin America is weak.

According to the Travel Industry Association of America (TIA), �international travel, business travel and air travel will continue to be down during the holiday season and into early �03; Internet bookings, leisure travel, auto travel, RV and cruise travel will be up.  Travel closer to home as well as last minute bookings will be up.� The Internet will be the primary growth market representing a jump from $24 billion in 2001 to $64 billion in �07 according to Jupiter Media Matrix. The growth will not come from new Internet users, rather more �bookers� than lookers. Prices are now transparent to all travelers, reducing growth in average rates until room demand rebounds more fully.  Holiday season travel will be up this winter due to pent up demand for close to home, family travel.

Some financial trends have emerged in our industry. Mezzanine finance, particularly with lenders asking for as much as 50 percent equity, has become commonplace. Firms to ensure that management is optimized are also utilizing asset management. Lodging stocks will likely be flat in the short-term but are positioned for growth in the near future. A good trend is the reduction in new supply; however, lenders are beginning to consider opening the spigot for selected hotel development projects.

Regional Economy
Key economic indicators in the state are strengthening and should improve next year. The economic environment in California and the surrounding states today remains as strong or stronger than the rest of the U.S. Most economists agree that the economy will improve gradually over the next couple of years, slowly improving consumer confidence, gross domestic product and corporate profits. Even then, growth will not be above average, because consumers� burgeoning load of debt will cut into their spending.  The Anderson Forecast predicted that much of California would face the same sluggish conditions as the rest of the nation, although San Diego may continue to outperform both the nation and the state. �San Diego just hasn�t seen the casualties that there have been in Northern California,� said Tom Lieser, senior economist for the forecast. �Even though San Diego has a fair amount of high-tech jobs, it�s still got a better employment mix than the Bay Area.� So far, San Diego County has fared better than almost any other region in the state.
�San Diego is a major beneficiary of added national defense spending, as well as a popular destination for California leisure and convention travel,� he said. �Though overall economic growth (in San Diego) is expected to be modest this year, activity will pick up significantly next year. We expect Southern California�s economy to outperform (those of) California and the nation next year.�

San Diego Lodging Forecast 2002
According to data through October 2002 from Smith Travel Research (STR), San Diego�s hotel market has held its own. Occupancy is at 71 percent, just below 2001 levels with average rates just over $112, keeping pace with 2001. In the meantime, we are fortunate to have over 700,000 room nights booked at the San Diego Convention Center in 2003 which will largely offset the 2003 sluggish business travel market.  In comparing San Diego to other California markets, the San Francisco Bay Area revenue per available room is down over 20 percent compared to last year, Los Angeles and Anaheim are down over 10 percent and San Diego is down 5 percent. Fortunately for San Diego, the regional �drive-to� market coupled with vibrant biotechnology and communications sectors has protected occupancy levels during the recession.  The San Diego hotel market�s recovery will depend in large part on the return of the business traveler. According to an Accenture survey of more than 950 business travelers at U.S.- based companies, business travel will improve over the next six months. If supply growth continues to decelerate, full economic recovery should begin by the end of 2003. Based on the group room nights booked at the San Diego Convention Center and the January Super Bowl, increases in demand should exceed increases in new supply. If we look back to the mid-90s, room rates recovered after occupancy rates firmed up.

When compared to the leading cities in the United States, San Diego is one of the strongest in both hotel industry performance and desirable destinations. The region is capable of absorbing several thousand new rooms over the next three years, most of which should be targeted for the convention center expansion. Specific markets where new hotel supply is capable of being absorbed include the downtown market area and coastal strip areas of La Jolla and Del Mar. These markets have a strong mix of corporate and leisure demand, both of which should begin to pick up in 2003.

San Diego benefits by having a �drive-to� market with travel market segments that do not require the return of the business traveler. These include convention, government and leisure travel. Based on that, the forecast is for occupancy levels to improve to 70 percent in 2003 with average rates up to $111. Provided at the end of this forecast is a graphic depiction of supply, demand, occupancy, and rates based on a 10-year history in San Diego County.

New development of hotel properties is limited in the immediate future. This is based in part on the difficult financing market today. San Diego�s lodging market should look forward to tremendous success in the future. On the attached graphic, it is easy to see what has occurred in San Diego�s lodging market over the past 10 years. When demand increases, occupancy levels move up, particularly when new supply is limited. In the early �90s, demand could not keep pace with supply. When it did catch up, rates firmed up and grew beyond the consumer price index. Today, with less than three percent per year supply growth, occupancy levels will begin to increase above 70 percent. That appears to be the magic number that drives average rate increases.  There are always caveats to a forecast of economic activity. These include but are not limited to further budget and trade deficits, changes in Fed policy on interest rates, corporate earnings, holiday spending, retail sales, continued terrorist attacks, war and general traveler sentiment. In addition, housing prices have in many ways held consumer spending up. Without this buoyancy, we would be struggling in a deep recession.

Trends and Forecast

* - includes actual data through October, 2002

• W Hotel downtown
• Marriott Springhill Suites Scripps Ranch
• Residence Inn Mission Valley/Sea World
• Staybridge Suites by Holiday Inn downtown
• Residence Inn of Marriott - Scripps Ranch
• Tower 23 Pacific Beach
• Manchester Grand Hyatt (additional rooms)
• Dana Inn Expansion
• Lodge at Torrey Pines expansion
• Del Mar Marriott, Staybridge Suites plus Homewood

Commercial Traveler Demand
Businesspersons requiring transient accommodations during their trips to the area businesses, universities, the military and hospitals generate commercial traveler demand.  Commercial traveler demand is expected to increase marginally in 2003 due in large part to the likelihood that this market segment will begin to improve slowly. This market also includes the extended-stay traveler who seeks out suites with full kitchens for stays of 5 nights or more. This market has been under-served in San Diego with less than four percent of the area�s hotels providing these services.

As an example, according to Marcus & Millichap, San Diego�s biotech demand has kept the office market alive as technology companies cut back spending, employment and office absorption. These same companies will fuel some job growth as well as extended-stay and corporate lodging demand.

Group Meeting Attendee Demand
The San Diego Convention Center (SDCC) expansion has greatly enhanced San Diego�s position in the national marketplace for major meetings. This market favors winter, spring and fall, which balances nicely for San Diego. According to the SDCC, definite group business of over 700,000 room nights are booked for 2003, an increase of over 200,000 nights when compared to annual room nights prior to the expansion of the center. These additional 200,000 plus consumed room nights could fill an 800-room new convention hotel at market occupancy levels without any business being derived from other sources.

Meetings at individual properties represent as much as 50 percent of room revenue at certain San Diego resorts and hotels. While this segment will not grow markedly in 2003, it should resume strong, steady growth in 2004. Thanks to the addition of the Lodge at Torrey Pines, renovation of La Costa Resort, addition of the Del Mar Marriott and W Hotel as well as the addition of several great golf courses, San Diego is now perceived as a more comprehensive resort destination.

Leisure Traveler Demand
Family travelers, visitors to local residents, real-estate relocation, international visitors and senior travelers generate this demand. In addition, this market includes baby-boomers seeking weekend packages for one- to two-night visits. This demand is characterized by multiple occupancy and is year round, with a high concentration during the summer months. We see an increase in demand in this sector, fueled by an improvement in the economy and a desire by the consumer to stay close to home. The San Diego market is accessible via auto to millions of Southern Californians.