Across the state, the pace of hotel construction continued to be sluggish during the first half of 2022, although the development of a 1,600-room bayfront hotel in Chula Vista helped San Diego County easily surpass development activity during the same period in 2021.
In its latest mid-year development report, Atlas Hospitality Group highlights what is likely to be an ongoing trend — a persistent slowdown in hotel construction in the face of rising interest rates, higher labor and construction costs, and a looming recession.
Atlas President Alan Reay acknowledged that the Chula Vista hotel project, by virtue of its enormous size, skewed the numbers for not only San Diego but the entire state.
During the first six months of this year, the number of hotels under construction nationwide fell 12 percent — from 132 to 116. Similarly, the number of rooms being built declined by 11 percent, from 17,962 to 15,958.
Also down significantly was the number of hotels that made their debut this year. In all of California 29 hotels opened in the first half of 2022, compared with 51 a year earlier, and the number of rooms fell to 3,561, down from 7,168, Atlas reported.
In San Diego County, just one hotel opened during the first half of the year — the 10-room Brick hotel in Oceanside. A year earlier, four hotels with 610 rooms had opened during that same time frame.
While the landscape for new hotel construction is not yet approaching the pronounced downturn following the Great Recession that started in 2008, there could still be a more pronounced decline in hotel development given the economy’s current volatility, said Reay.
“With rising interest rates, we’re definitely going to see a dampening effect on new construction for at least the next 24 to 36 months,” Reay predicts. “We’re already seeing lenders pulling back from the segment anyway. The big unknown is if the economy falls into a prolonged recession. If that happens we could see a slowdown that comes close to the 2008 post slowdown.”
It took several years for the hotel industry to recover from the last big recession. Not until 2015 did hotel development come roaring back, said Reay. That year, 98 hotels opened up in California, an increase of 253 percent over 2014, he said.
“When (existing) hotels start selling for higher than what it costs to replace them, that will drive people back into construction,” Reay said.
That San Diego County now has nearly 2,000 hotel rooms under construction is something of an aberration because of the Gaylord Pacific Resort in Chula Vista — a waterfront project that has been decades in the making. Once completed, it will be just 28 rooms shy of the county’s single largest hotel, the 1,628-room Manchester Grand Hyatt.
While the pandemic last year clearly dampened some developers’ appetite for moving forward with hotel projects, the lodging properties are currently reaping the benefits of a surge in travel, and room rates are exceeding levels before the arrival of COVID-19.