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Hotel Rates Continue To Rise In San Francisco, But Will Travelers Keep Coming?

Hotel rates continue to rise to record levels in San Francisco, but the city faces many challenges — ranging from a lack of new hotels to trouble on the streets — that could keep tourists and business travelers away.

CBRE Hotels Managing Director Julie Purnell

“The development community is interested in this market because of the frothiness and the business and demand drivers in the San Francisco Bay Area,” CBRE Hotels Managing Director Julie Purnell said during Bisnow’s Bay Area Hospitality and Lodging event.

San Francisco and San Mateo increased revenue per available room by over 10% in June with average daily rates rising to just over $238. It was the only market in the top 25 markets to post a double-digit increase in both RevPAR and average daily rate, according to Meetings & Conventions. Conference-related demand went up as well with the Moscone Center reopening. In July, ADRs increased again to $256, a 9% increase year over year, Hotel News Now reports.

As rates continue to rise, and few hotels actually get built, Greystone Hotels President Eric Horodas said the industry is headed toward similar conditions as in late 1990s.

“Things got so expensive in San Francisco that big conventions started going to other places like Orlando, Vegas and other cities like that,” Horodas said. “We’re at risk of that happening again.”

While business is good in the short term since conventions have already been booked, conventions may start reconsidering whether or not to host an event in San Francisco in 2021 to 2023.

In addition to increased competition from other markets, hotels also have been contending with homelessness and unsafe street conditions, which have been driving tourists away. Unsafe street conditions have already led to a major medical association deciding to relocate its convention in the future.

“It’s really nice to own hotels in San Francisco in the constrained market, but I really fear it’s going to sunset,” Horodas said.

Alternatives Sought To Keep Up With Demand

JMA Ventures President Todd Chapman, Studio KDA principal Marites Abueg, Knowhere Holdings Chief Operating Officer Shannon Shackerley-Bennett, CBRE Hotels Managing Director Julie Purnell, Arent Fox partner Rich Brand and Bisnow West Coast Regional Director Nick Bates

Rising hotel rates and a lack of rooms is helping alternative hospitality markets grow in the Bay Area.

“San Francisco is the reason why Airbnb exists,” Golden Gate Restaurant Association Executive Director Gwyneth Borden said. She said one of the founders was working in the design world and attending a conference in San Francisco when he couldn’t get a hotel room and ended up sleeping on an air mattress.

The number of Airbnb rentals has declined even though demand continues for rooms throughout the city. The number of Airbnb hosts has declined to 3,850 hosts as of July from over 8,000 a year ago after new citywide regulations have gone into effect. Demand for these rooms remains strong and occupancy rate has risen to 90% as of July compared to 67% in December, according to AirDNA data.

But building more hotels to meet demand isn’t easy.

“In the race between office and hotel, office is still winning,” HKS senior designer Jessica Sager said.

She said a lot of sites just aren’t penciling for hotels while several more in Central SoMa are awaiting city approval of the new Central SoMa plan. Sager said her firm has looked at a lot of sites in South of Market that would be good for future hotels, but the projects are waiting for zoning changes under the Central SoMa plan.

“Once all that is adopted and implemented, South of Market will become a much more vertical neighborhood,” she said.

CORRECTION, SEPT. 26, 3:45 P.M. PT: A previous article incorrectly stated the number of short-term rentals. The article has been updated.

HKS senior designer Jessica Sanger

Borden, who served six years as a San Francisco planning commissioner, said the tension between housing and every other land use remains difficult as well. This often requires creative solutions. 

The San Francisco Municipal Transportation Agency is considering converting a parking garage near the Moscone Center into a hotel and residential project, said Borden, who also serves on the board of the SFMTA. While combination of residential and hotel is nothing new, the agency is exploring how to incorporate affordable housing into hotels, she said.

Hotels also are being built in neighborhoods that did not have them before. Several hotels, such as the Proper Hotel, have been built in Mid-Market, which has been a typically difficult neighborhood for the city, CBRE Hotels' Purnell said.

As hotels are built in new neighborhoods, new destinations are emerging throughout the city. Purnell said hotels also are cropping up in Mission Bay and south of Brannon Street.

“When hotels come into the market, other businesses follow,” she said. “We’re going to see a lot more growth in communities that we don’t have today.”