San Diego Hotel Developers Discuss How Innovative, Bold Projects Are Changing Downtown

Lots of new developers have entered San Diego’s hotel market in recent years, according to McCullough Landscape Architecture principal David McCullough. David moderated the Past, Present & Future panel at Bisnow’s San Diego Hotel Development Takeoff last week. He asked panelists how they think the new hotels are changing the face of Downtown SD.

Shown above are moderator David McCullough, hotel developer Robert Green and commercial builder Terry Arnett.

Marriott International SVP Tye Turman talked about the diversity of product developers are bringing to Downtown. He cited J Street Hospitality projects as an example—the company opened two Marriott hotels in 2015, a Courtyard and Residence Inn in the Gaslamp Quarter and is working on a Moxy by Marriott. The company also converted an SRO to a boutique Z Hotel and is underway on two Hilton brands, a Canopy and Hampton Inn & Suites scheduled to open in 2018—also in the Gaslamp.

Tye said of J Street founder and president Sajan Hansj, "He is the type of guy who can take a 5k SF space and say, ‘I can do something with that.’ So I think it creates great energy and encourages not just the hospitality industry, but other sectors as well to rethink how we’re doing business in our city.”

David said the The Robert Green Co is among the newer developers doing projects in Downtown and asked CEO Robert Green how he feels about changes new blood is bringing into the market. Robert said developers need to be bold and innovative. “We've been talking about making the Downtown market more attractive to business for a long time.

"But we’re faced with contradictions where we’re afraid to make a bold move, like a Chargers stadium,” he said, noting developers of Petco Park were both innovative and bold. “We had a city then that was not afraid to take a chance to create a world-class environment—I can’t imagine what the Gaslamp would look like now without Petco."

His firm is working on two very bold, high-profile Downtown projects. Fifth Street Landing consists of an 831-room convention center hotel adjacent to city’s meeting facility on the bay front, which connects to a 565-bed, low-cost shared-lodging hotel. The project includes expansion of the marina, including a public boat dock and recreational island; a promenade with cafés, restaurants and shops; and public open space and viewing plazas.

The other project is a 317-room Pendry Hotel by Montage in the Gaslamp. This full-service hotel will open this fall, with two restaurants, a micro-brewery, a 6,200 SF fitness center, a rooftop pool and 30k SF of meeting space.

Asked to identify unique, innovative projects in Downtown that may drastically change the way hospitality developers do projects, RAR Hospitality CEO Robert Rauch said replacement of Fat City, a 1940s nightclub on Pacific Highway, with a 364-room, dual-branded Hilton Garden Inn and Homewood Suites was a creative move. “We need creativity all over the place—especially the waterfront,” he said. Robert said there is a need for politicians and financiers on the equity side to support developers doing bold projects.

TSA Contracting president Terry Arnett said the project that comes to mind is a Marriott in the Gaslamp that went vertical on a 5k SF footprint, creating some really nice space, especially at the top. “That was pretty impressive, taking that small lot and deciding to build on it.” He was describing J Street’s Courtyard by Marriott on Sixth Avenue, a 90-room, 14-story hotel with a restaurant on the top floor that offers sweeping views of the city’s skyline and bay. Terry also said developers are beginning to reposition obsolete buildings into lower-rate lodging projects, a trend he expects will continue.

Robert Green cited 7th & Market Street, Cisterra Development’s mixed-use project in East Village, which includes a Ritz Carlton & Residences, as well as a Whole Foods, apartments and office space. “This is the type of bold project that will make the difference for San Diego, keep us moving forward toward a world-class city,” he said. "That type of investment, that type of mixed-use project takes a lot of thought and is very difficult to create, not just because of the technical and structural issues, but the financing of such a project is really difficult.”

David said mixed-use development with a hotel component seems to be a growing trend, but financing them is a big challenge. He asked the panelists if they have any ideas for solutions to this problem. Tye said when Portman Holdings began the dual-brand Springhill Suites & Residence Inn on the bay front, financing was especially difficult. He said Marriott considered this a “halo” project, so went to the financier with a letter of credit that guaranteed the 10% of the loan, which helped push that deal over the finish line.

Robert Rauch (below right) blamed lenders for slowing development by tightening the purse strings, which he said will bring the cycle to an end. In places like New York and Houston, the cycle is already over, he said, noting it may be over in some areas of the SD region, but some submarkets are still growing. Robert said while hotel financing is drying up, even with all the recent hotel development and projects in the pipeline, the SD market is not overbuilt, because supply was constrained for such a long time.

He blamed local politicians for a slow start following the Great Recession, suggesting they didn’t take risks necessary to grow the economy. He predicted a soft landing, but no recession. "We’re already in a soft landing if you think about it: things are going nowhere, but it’s still pretty good,” Robert said.

Tye (above left) said there are already indicators: sites hard to come by, rising construction costs and difficult financing. But he said Marriott hasn’t experienced any slowing, “so we’re going to continue to ride it out as long as we can. Our pipeline is as strong this year as last year. Last year was our best year ever, and we’re on pace for the same this year.”

“It’s over in the minds of capital,” said Robert Green, because lenders have stopped financing hotels. He said, however, the market is doing well—“there’s no doom and gloom"—during the first five months of the year, San Diego experienced a steady rise in hotel occupancy and RevPAR. With the Pendry under construction, Robert keeps a close eye on hotels of more than 300 rooms with rates above $200/night. He said that asset class is doing exceptionally well, staying around 60% occupancy.

David said about 15,000 keys are in the pipeline in California and asked the group if they perceive a bubble in the market. While there seems to be dearth of development throughout California, Robert Green said nothing was going on for five to six years between 2007 and 2014. He said no bubble exists, that developers are just making up for lost time. Unlike other areas, like Texas and Oklahoma, where it’s easy to get projects done, developers are attracted to California, because of the high barriers to entry. “Getting through the entitlement process can take years to get done, and a lot of people don’t have the stomach for it,” he said.

Terry said a shortage of skilled construction workers is another reason California will not be overbuilt. He said the problem is even more acute in the Bay Area, where workers are being recruited off union jobs with higher wages.

The panelists also gave their opinions on the convention center expansion and proposed Chargers stadium. Robert Green, who favors the stadium proposal, kicked off the discussion, saying, “This goes back to what I said earlier about us thinking big, being bold and becoming a world-class city. I’m a Chargers fan, but not a fanatic. To me it’s more about civic pride and being a world-class city. It’s about being bold and looking at an area that contains a bus yard and parking lot and saying, ‘Is there a better use for this and do we have an opportunity to do something bold and exciting here?'”

He said what opponents are glossing over is the fact “the opportunity for a contiguous convention center expansion on the waterfront no longer exists—that ship has sailed.”

If this is going to happen, and your primary business is tourism, how do you do it in a fashion that it’s not an inconvenience for convention customers to go place to place, said Tye. He suggested getting those with a vested interest together to come up with a solution, be that a shuttle service or tram system.

Robert Rauch said the 4% hotel tax hike “is a nonstarter for me. It’s a hotel industry tax—no, it’s not coming out of our pockets, but it’s not hitting the rental car industry, attractions or anybody else. It’s not being done as a consensus, but as an initiative put forth by the Chargers. The Citizen’s Plan is not a citizen plan, it’s Corey Briggs plan. “Let’s get everyone in a room and work it out,” he said.

Robert Green noted that politicians aren’t taking a stand one way or the other, or coming up with alternative solutions, because it’s an election year.