San Francisco investors are keeping a close eye on San Francisco. For the first time in 20 years, hotels are being built. Occupancy remains strong and rates are among the highest.

Even though rates have flattened because of the lull in convention business due to the Moscone Center’s expansion, San Francisco will remain on the top of institutional investors’ lists, according to KHP Capital Partners managing partner Mike Depatie, who spoke at Bisnow’s San Francisco hospitality event Wednesday.

“San Francisco is one of the most dynamic markets in the country,” Depatie said. “It’s got some of the highest occupancies, highest daily rates and institutional investors love it.”

Within the last 20 years, the numbers to develop new hotels have not made sense, but now they are starting to make sense, according to Yang Capital co-founder and partner Stephen Yang. Prop M, which caps office development at 2M SF, and affordable housing requirements have developers moving toward hotels. His firm also is considering building a new hotel in San Francisco.

San Francisco’s demographics play a part in the city’s ability to grow its hospitality market. Most residents are renters concerned more about job creation and rental rates. With a focus on these two areas, residents are less concerned about hotel growth. Yang said this is different from other cities that may consider growth in other aspects.

“When you look at a zoning map [in San Francisco], there are few places to put a hotel,” Yang said.

Airbnb Versus Hotel Industry?

Even with additional competition from Airbnb, San Francisco’s hospitality industry will remain strong.

“Airbnb speaks to the demand for something different, something unique, something real, something authentic that we deliver in boutique-style hotels,” Depatie said.

Airbnb has brought in visitors who would not otherwise stay in San Francisco and attracted visitors who would otherwise stay in San Francisco hotels, Depatie said. While Airbnb is popular among millennials, he does not expect Airbnb to grow four times its size.

“It certainly is not the death knell of the hotel business,” Depatie said.