Silicon Valley Tech Boom Creates Surge in Hotel Development

CoStar
01/10/20

Silicon Valley Tech Boom Creates Surge in Hotel Development
Santa Clara County Leads California for 2019 Room Openings, With More on the Way
By Lou Hirsh

Development
https://www.costar.com/article/1838448630/silicon-valley-tech-boom-creates-surge-in-hotel-development

California’s Santa Clara County led the state in construction of new hotel rooms in 2019, thanks largely to business travel demand fueled by Silicon Valley’s booming technology industry, according to a new study.

Brokerage and research firm Atlas Hospitality Group found that in a year that set a state record for new hotel rooms opened, at 11,795, the heart of Silicon Valley led all regions with 1,919 rooms opened at 12 properties.

“It is one of the most desirable markets in California for hotel developers, based almost 100% on the strength of the tech market,” Atlas President Alan Reay told CoStar News, adding the general trend is likely to continue well into 2020 and beyond.

Santa Clara County is home to San Jose, the nation’s 10th-most populous city, and several suburbs hosting fast-expanding operations of the world’s largest technology companies, including Google, Facebook, Apple and Netflix.

It is the core of a larger region of Northern California known as Silicon Valley, among the world’s largest hubs for technology companies and the venture capital firms that fuel their growth. The high-tech economy has added 250,000 jobs to the region over the past decade, representing growth of 31%, according to state and regional employment data.

Growing tech operations have in turn fueled development of new apartments, offices, industrial parks, hotels and other commercial facilities used by those workers.

More than 10 years into the current U.S. post-recession economic expansion, California hotel performance metrics generally remain strong by historical standards, buoyed by a combination of healthy tourism and steady growth in business sectors, including technology.

According to the latest available data from travel research firm STR, a CoStar Group company, Santa Clara County’s hotel occupancy stood at 75.2% through the first 11 months of 2019, down 5.5% from the year-earlier period. Meanwhile, the region’s average daily room price rose 1.8% to $212.31.

While average per-room revenue and total revenue for Santa Clara County hotels were down from a year ago, they remained close to post-recession peaks as growth has slowed. The region’s hotels racked up more than $1.49 billion in revenue in the first 11 months of 2019, a decline of 1.1% from a year ago but still topping the comparable-period tallies for 2013 through 2017, according to STR data.

STR Senior Vice President Jan Freitag said that despite historically strong performance metrics, Santa Clara County hotel demand has recently been slipping while room supply has been growing. He will be watching in the coming year to see how that impacts hoteliers’ pricing power and ultimately developers’ appetites for boosting room counts.

“It remains to be seen whether this is a blip or a trend — that’s the question,” Freitag told CoStar News.

For now, the recent hotel performance numbers are apparently encouraging developers. After leading the state for new rooms opened in 2019, the year-end Atlas Hospitality Group report said, Santa Clara County has 17 hotels with another 2,539 rooms under construction. There are also 76 hotels with 11,567 rooms in planning, up 29% from a year ago.

“Despite the increased cost of construction, California hotel developers continue to build, and lenders continue to provide financing,” Atlas researchers said. Reay noted this is driven largely by the premium that owners can charge for new rooms versus older competitors, along with the ultimate premium they can drive when it comes time to appraise a property for sale.

“California has been able to absorb the new room supply so far, which is why the state continues to attract so much interest from domestic and international investors,” the Atlas report says.

California now has 212 hotels with 28,102 rooms under construction. There are another 1,199 hotels with 159,711 rooms in various planning stages, a 7% room count increase from a year ago.

Los Angeles County has the most rooms under construction, at 7,030, followed by neighboring Orange County with 3,166 and San Diego County with 1,696.

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