Sunny Outlook on San Francisco and Silicon Valley Hotel Occupancy

Super Bowl Sunday did not turn out the way football fans would have liked, but it was another great day for hoteliers in the City by the Bay. San Francisco and nearby Silicon Valley substantially outperformed both the national and state averages in the hotel and hospitality industry.

San Francisco Hotel Room Rates

San Francisco, like Chicago and New York, has always been on the high-end of the hotel market. Luxury hotels and upscale properties that cater to the business traveler dominate the core of the city. One night in an upscale hotel by the Fisherman’s Wharf can exceed $200 easily.

Silicon Valley Hotel Room Rates

Silicon Valley, the home of many of the world’s leading technology companies, is located just a short distance south of the San Francisco Bay Area. Among the cities that are part of Silicon Valley are San Jose, Santa Cruz, Cupertino, Palo Alto and Mountain View. Average rates for hotel rooms are above the U.S. average and comparable to the average room rates for the state of California.

Key Hotel Industry Data for the United States

Widely accepted measures of a hotel’s success are the occupancy rate, ADR (Average Daily Room Rate) and the RevPAR (Revenue per Available Room). Data shown below can be found in the 2013 Smith Travel Research Report for the year ending December 31, 2012.

United States

2011 Occupancy Rate ….. 59.9
2012 Occupancy Rate ….. 61.4
Year-over-Year Percentage Change ….. +2.5%

2011 ADR ….. $101.85
2012 ADR ….. $106.10
Year-over-Year Percentage Change ….. +4.2%

2011 RevPAR ….. $61.02
2012 RevPAR ….. $65.17
Year-over-Year Percentage Change ….. +6.8%

San Francisco/San Mateo

2011 Occupancy Rate ….. 79.0
2012 Occupancy Rate ….. 80.4
Year-over-Year Percentage Change ….. +1.7%

2011 ADR ….. $154.93
2012 ADR ….. $171.72
Year-over-Year Percentage Change ….. +10.8%

2011 RevPAR ….. $122.38
2012 RevPAR ….. $$137.99
Year-over-Year Percentage Change ….. +12.8%

San Jose/Santa Cruz

2011 Occupancy Rate ….. 68.8
2012 Occupancy Rate ….. 71.9
Year-over-Year Percentage Change ….. +4.5%

2011 ADR ….. $113.26
2012 ADR ….. $124.38
Year-over-Year Percentage Change ….. +9.8%

2011 RevPAR ….. $77.87
2012 RevPAR ….. $89.39
Year-over-Year Percentage Change ….. +14.8%

Outlook for the San Francisco Hotel Market

In a January 2013 Hotel News Now article entitled Executives Identify Hot U.S. Markets, top executives from some of the major hotel chains in America were asked to evaluate key markets in the industry. One of the participants in the America’s Lodging Investment Summit was C.A. Anderson, VP of Development for Choice Hotels’ International Cambria Suites brand. When speaking about the hotel market in San Francisco, Anderson said, “San Francisco is a city that’s on fire. There’s a lack of land.”

Outlook for the Silicon Valley Hotel Market

Santa Clara is one part of the Silicon Valley that has done particularly well. June of 2012, Santa Clara saw hotel occupancy rates at 86 percent, an increase of six percent over the June 2011 occupancy rate. Hoteliers in the Silicon Valley city increased their ADR from $138 in June 2011 to $147 in June 2012.

Silicon Valley is like a magnet, attracting visitors from all around the world. As venture capitalists are busy backing the next Apple or Facebook, an energy permeates the air. Labor officials expect more than 200,000 new jobs to be added by the more than 6,000 technology companies from Mountain View to San Jose. Hotels are projected to have higher occupancy in 2013 and for several years to come.

Nature of Growth in San Francisco and the Silicon Valley

In the hotel industry, when occupancy reaches or exceeds 62 percent, hotel managers begin to have an easier time raising the rates they charge for rooms. Naturally, if you can keep your occupancy rates up while raising the price of your rooms, you will generate more revenue and, hopefully, bigger profits.

Since the depths of 2009, when the entire hotel industry was depressed because of the state of the economy, this northern part of California has been improving yearly. Luxury and upscale hotels in San Francisco and the Silicon Valley have recorded best gains. As more people find jobs, the middle class can afford to travel more often. It is expected that over the next several years mid-priced hotel rooms, in the $100-$150 range, will benefit the most.

According to PKF Hospitality Research, the occupancy rates for the San Francisco and Silicon Valley areas of North California will remain well above 70 percent over the next four years. ADR is expected to average 5.4 percent annually. For 2013, PKF is projecting a slight 0.4 percent reduction in occupancy rates and ADR at a robust 8.8 percent.

Demand may Drop as Prices Rise

Anytime you raise prices on hotel rooms, you risk the loss of business. When analyzing the San Francisco market, it is clear that RevPAR is being driven higher primarily by hotels increasing their prices or ADR. In 2012, occupancy rates rose just 1.7 percent over 2011 figures, however, ADR rose 10.8 percent and RevPAR shot up higher than 2011 numbers by 12.8 percent.

San Jose and Santa Cruz, in the Silicon Valley was slightly more balanced. Occupancy rates were higher in year-over-year comparisons by 4.5 percent and ADR was up by 9.8 percent. Both figures were instrumental in giving San Jose and Santa Cruz hotels a notably strong 14.8 percent increase in 2012 RevPAR over the 2011 RevPAR figures. In absolute dollars, RevPar went from $77.87 in 2011 to $89.39 in 2012.

New Hotels

Hotel developers are taking a cautious and somewhat subdued approach to new construction. More hotels are being renovated and upgraded as opposed to being built from the ground up. In San Francisco, a small, 22 room, boutique hotel called the Inn at the Presidio opened in 2012. The Hilton San Francisco Union Square completed a $51 million renovation. Opening on January 17, 2013, the Four Points by Sheraton San Jose-Silicon Valley is the newest hotel to grace San Jose and the Silicon Valley. The 208 guest rooms and 24 suites are centrally located near the Norm Mineta Airport.

2013 and Beyond

All of the analysts that follow the San Francisco and Silicon Valley hotel and  are in agreement that the industry will do well over the next four or five years. A recovering economy, both here and abroad, will lead to more visitors booking rooms, and they will be willing to pay somewhat higher prices for accommodations.

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