Slump Hits San Francisco Hotels

After years of turning away guests and raising room rates, hoteliers across the San Francisco Bay Area have been hit by a sharp drop in business travel that has left them struggling to fill rooms.

The region has reported some of the nation’s steepest declines--10% and more--in hotel occupancy rates during the first half of the year as the dot-com bust and a slowing economy have triggered major cutbacks in business trips and meetings. Investors have rushed to cancel or postpone development plans, but numerous new projects are scheduled to open their doors this fall, intensifying the competition for a shrinking pool of travelers.

Despite attempts to cut costs and drum up new business, it will be several years before San Francisco hoteliers recover from what promises to be a costly slump, said industry observers.

“Business is tough in the Bay Area,” said Marc Grossman, spokesman for Hilton Hotels Corp. “We don’t necessarily see a turnaround in business travel for the rest of the year.”

During the first half of 2001, San Francisco’s occupancy rate fell by more than 10%--to 73.7%--from the same period last year, according to PKF Consulting. The results were even more dismal in Silicon Valley, which is heavily dependent on high-technology business travel. There, the first-half occupancy rate was down nearly 17%.

Meanwhile, hotel markets in Southern California reported occupancy rates that were down only slightly or up from last year’s levels.

“Leisure travel has been pretty solid this year . . . but there has been a big downturn in business travel,” said Kenneth Kuchman of PKF Consulting in San Francisco. “They just aren’t traveling.”

Hotel industry observers say 2001 looks dreary in part because it is being compared with last year’s record results in San Francisco and across the nation. Also, industry conditions are nowhere near as bad as they were during the recession of the early 1990s, and average room rates continued to climb during the first half of this year.

But there’s no denying that demand for Bay Area hotel rooms in early 2001 went into a nose dive that has resulted in unexpected bargains for travelers. Though published room rates may have inched up, there is no shortage of steep weekend discounts, promotions and package deals, said Eric Gustavson, general partner of San Francisco Reservations, a hotel booking agency.

“There were some value rates last year, but nowhere as deep or as extended as they are this year,” Gustavson said. “Hotels have gotten very aggressive with discounts.”

Room rates are certain to fall as hotels start negotiating next year’s contracts with corporate customers and package tour operators.

“There’s a threat of serious room-rate competition among the hotels,” Kuchman of PKF Consulting said. “If that happens, it takes many years for the hotels to get the rates back up.”

The drop in occupancy rates and the prospect of falling prices have led nervous developers to cut by half the number of hotel rooms planned for San Francisco, said Alan Reay, president of Atlas Hospitality Group.

“New development has dropped off, and it’s impossible to get financing,” Reay said.

However, new hotels conceived during the boom times are scheduled to open in the next few months from suburban Sunnyvale to centrally located Union Square. A new Four Seasons and an Omni hotel will add about 700 guest rooms to central San Francisco. In Santa Clara County, seven hotels are under construction, including a 500-room Marriott in San Jose.

Despite the dim outlook, hotelier Ian Schrager, who recently reopened San Francisco’s legendary Clift Hotel after an extensive renovation, said he remains confident in the market’s long-term prospects.

“I wish that there was more demand and not as much supply, but . . . I’m still a firm believer in the fundamental appeal of the Bay Area,” Schrager said.

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Room at the Inns

A steep drop in business travel has left San Francisco area hotels with a growing inventory of empty rooms.

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Occupancy Rates: (First half of 2001 compared with same period last year)

San Francisco

2000: 82.7%

2001: 73.7%

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San Francisco Airport

2000: 82.5%

2001: 71.0%

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Silicon Valley

2000: 82.6%

2001: 68.9%

Source: PKF Consulting