Ernst & Young Report Cites Strong Demand and Limited Supply in California's Four Major Markets

Future Trend: "Condotel" condominium conversions could further deplete room stocks in some markets

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. October 14, 2008

LOS ANGELES, CA, September 8, 2005. California's major hospitality markets showed strong growth in the first six months of 2005 -- a trend that is expected to continue into 2006 -- according to a mid-year report released today by Ernst & Young's Hospitality Services Group.

The study also found that condominium conversions are beginning to have an impact on existing hotel room stocks. Baby boomers are expected to lead the charge in buying up converted hotel rooms, "condotels," as more developers rush in to serve the demand for second homes. Not just in Hawaii either. The EY report expects both boomers and businesses to feed another growing trend to convert urban center hotel rooms in major urban markets all across the nation, including California, despite moves such as San Francisco's recent moratorium on conversions.

Hotel occupancy increased 3.2 percent in the first six months of this year versus the same period in 2004, according to data provided by Smith Travel Research. This growth outpaced overall occupancy figures for the U.S. of 2.8 percent and placed California second only to Hawaii in overall performance. Average daily room rate (ADR) increased 5.2 percent statewide over the same period compared to 4 percent nationally.

Los Angeles showed the strongest overall performance among the state's four major hotel markets with a 6.9 percent increase in ADR and 4.2 percent rise in occupancy in the first six months. No new hotels opened in the City of Los Angeles in the first six months but eleven hotels totaling 874 rooms are under construction in the metropolitan area and will be opened between 2006 and Spring 2008.

San Diego posted the highest increase in ADR (8 percent) but occupancy increased only 1 percent due to a 2.5 percent growth in the supply of new hotel rooms. Nevertheless, San Diego continues, for the time being, to be the overall top hotel market in California in terms of RevPAR.

Increased business and tourist travel and a steadily improving local economy were largely responsible the San Francisco Bay Area's 3.3 percent increase in ADR and 3.2 percent occupancy growth in the first six months. Investor activity in Northern California is also strong with the region experiencing the most hotel transactions of any market in the state in 2004.

Disneyland's 50th anniversary celebrations are expected to positively influence the Anaheim/Orange County hotel market through the end of 2006. Yet, despite the celebrations only beginning in May, Anaheim/Orange County posted a highly respectable 5.1 percent increase in ADR and 5 percent growth in occupancy in the first six months of the year. Convention activity is also expected to pick up through 2006.