SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA

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1 MARCH 2014 $500 IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA Author Nordee S. Saritvanich, Analyst HVS Los Angeles West 190 th Street, Suite 400, Los Angeles, CA 90248, USA

2 A strong destination market with a beautiful oceanside location, distinctive tourist attractions, growing tech industry sector, and world-class universities bode well for hotel performance in the Santa Barbara area, also known as the American Riviera. Constrained new hotel supply buoys operators and investors expectations. Ninety five miles northwest of Los Angeles is the coastal city of Santa Barbara. Nestled between the Santa Ynez Mountains and the Pacific Ocean, this American Riviera is a year-round tourist destination known for its warm Mediterranean climate, sandy beaches, distinctive Spanish Colonial architecture, upscale retail and restaurant outlets, and nearby world-class wineries. A discussion of the Santa Barbara lodging market would not be complete without also including its neighbor to the west, the city of Goleta. Also known as Techtopia, Goleta has regional retail stores, tech and startup companies, and a strong and growing corporate presence. In collaboration with the Goleta Valley Chamber of Commerce and the University of California at Santa Barbara, the City has launched the Goleta Entrepreneurial Magnet (GEM) initiative to gain recognition as a world-class regional center for tech development. Lodging properties in the Santa Barbara market include a diverse mix of hotel types, ranging from boutique, limitedservice hotels to five-star, luxury resorts. No one type or size dominates or is characteristic of the local submarket. In Goleta, lodging properties tend to be limited-service, selectservice, and extended stay hotels. Four main clusters of lodging facilities are found in the city of Santa Barbara: two clusters along the city s waterfront (West Beach and East Beach), the downtown district, and upper State Street northwest of downtown. All of these cater primarily towards leisure guests. Hotels in the city of Goleta are generally located just off of Highway 101; these hotels cater chiefly towards corporate guests. Larger hotels and resorts that attract social and incentive groups are speckled throughout the area. SANTA BARBARA AND GOLETA HOTEL CLUSTERS IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 2

3 MARKET DRIVERS Tourism As a leisure destination, Santa Barbara s economy is supported by the hospitality, service, and retail industries. According to the recent Visitor Profile Study commissioned by Visit Santa Barbara (Santa Barbara s CVB), individual leisure guests make up the majority of visitors that come to the Santa Barbara South Coast region 1, constituting approximately 80% of total fiscal year (FY) 2013 visitation; 10% of visitors came to area for business-related purposes, while the remaining 10% cited other personalrelated reasons. 2 In FY 2013, 6.1 million visitors were drawn to the South Coast, providing $1.5 billion in direct visitor spending and $46 million in tax revenues. 3 In FY 2013, nearly 1.5 million visitors, or 24.2%, of the total, stayed in hotels during their visit. The average hotel guest spent 2.4 nights at a lodging facility and 2.2 days in the market. South Coast visitors are very loyal and the market draws considerable repeat visitation. The typical visitor made 4.8 trips to the area within the past year. 4 Besides beautiful beaches, unique historic and cultural attractions, and abundant shopping and dining options, there are also nearby wineries with wine tasting rooms and a variety of performing arts venues. Summer festivals that draw on the cultural heritage of the city, such as the Summer Solstice Parade, La Fiesta de Santa Barbara, and Santa Barbara Festival of the Arts, also bring in large numbers of tourists. During the slow season in January, the Santa Barbara International Film Festival draws upwards of 50,000 attendees. Additional attractions include: Stearns Wharf, a historic pier in the harbor. Constructed in 1872, it was once the longest deep-water pier between Los Angeles and San Francisco. Today it is the most visited landmark in Santa Barbara and offers dining, shopping, wine tasting, and fishing activities. Santa Barbara County is home to more than 115 wineries and 21,000 acres of vines. Various winerelated events are held annually, including the Santa Barbara County Vintners' Festival and Santa Barbara Uncorked. Additionally, downtown Santa Barbara is home to the Santa Barbara Urban Wine Trail, which encompasses 22 wine tasting rooms, all within walking distance from one another. Mission Santa Barbara, founded in 1786 as the 10 th of 21 Franciscan missions in California, is known as the "Queen of the Missions for its graceful beauty. The Mission has a rich history and acts as a monument to the cultural diversity of California's heritage. The structure exemplifies the distinctive Spanish colonial architecture prominent throughout the city. MISSION SANTA BARBARA Historic Downtown Santa Barbara on State Street is a shopping mecca. Retailers include such high-end department stores as Saks Fifth Avenue and Nordstrom, and many independent boutiques. Visitors are also treated to fine dining restaurants and trendy lounges. 1 Includes the cities of Santa Barbara, Goleta, and Carpinteria, and the unincorporated communities of Montecito and Summerland. 2 Destination Analysts, Inc., Santa Barbara South Coast Visitor Profile Study, August Ibid. 4 Ibid. IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 3

4 Wide sandy south-facing beaches along the waterfront sustain tourism year-round. The coastline is known for some of the best surf breaks in the world as well as offering zones for stand-up paddle boarding. From here visitors can embark on dinner cruises or day trips to the Channel Islands, where kayaking and SCUBA diving are favorite activities. SANTA BARBARA SURF BREAK Approximately 85% of the visitors to the market hail from the United States; more than half of these are from the Greater Los Angeles Area (Los Angeles County, Orange County, the Inland Empire, and Ventura County), which has a population of 18 million. Most visitors (86% of total) arrive by car. 5 Although they make up a smaller proportion, Canada, the United Kingdom, and Germany rank as the top international feeder markets. 6 The Santa Barbara Municipal Airport, located within city limits, is a regional airport serviced by only five passenger airlines with six non-stop destinations: Los Angeles, San Francisco, Denver, Phoenix, Portland, and Seattle. The combination of the small size of the airport (three runways) plus its limited airlift effectively curtails a large volume of visitors from coming to Santa Barbara by air. During the previous economic downturn, Visit Santa Barbara partnered with local tourist and business organizations to develop a strategy to bring more cruise ships to Santa Barbara in order to boost the local economy. Results have been favorable as the city has become a popular port in recent years. In 2013, the number of cruise ships more than doubled to 21 from 10 in 2012, which had a consequent $2.4 million dollar economic impact on the city. There are 29 visits scheduled in 2014, which should further bolster exposure and tourism. 7 Cruises that stop in Santa Barbara are typically part of a Pacific Coast Cruise that embarks from Los Angeles and stops in other destinations like San Francisco, Catalina Island, and Ensenada, Mexico. Major ships include Princess Cruises 3,700-passenger Sapphire Princess and Celebrity Cruises 4,600-passenger Celebrity Century & Solstice. Corporate The city of Santa Barbara itself is not known as a corporate hub, but as the county seat, it has notable local government activity. Most of the major companies in the region are based in neighboring Goleta. Some of the largest high-tech firms in the country (electronics, software, telecom, defense, medical device, and remote sensing manufacturing industries) have their research and development divisions located here and include Raytheon, Citrix Online, Yardi Systems, Allergan, and Medtronic. 8 The healthcare industry also constitutes a significant portion of the area economy. Owned and operated by Cottage Health System, Santa Barbara Cottage Hospital is a general medical and surgical hospital in the city of Santa Barbara. Goleta Valley Cottage Hospital and Santa Ynez Cottage Hospital are also within the Cottage Health Care System. 5 Destination Analysts, Inc., Santa Barbara South Coast Visitor Profile Study, August Ibid. 7 Visit Santa Barbara, Cruise Ship Visitation Leaves A Positive Economic Impact on Santa Barbara in its Wake Press Release, January 22, Goleta Valley Chamber of Commerce. IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 4

5 As Goleta is where most corporations are based in the market area, corporate transient demand is predominately captured by its hotels and motels. However, these companies also generate group demand from their respective incentive programs that tend to book meeting/event space and associated room nights in Santa Barbara. The portion of Santa Barbara s lodging demand that is business/group driven gets captured by larger, full-service hotels such as the 360-room DoubleTree Fess Parker Resort or the 207-room Four Seasons Biltmore Resort. Group demand for the Santa Barbara market consists mainly of weddings, reunions, executive retreats, and corporate incentive programs. MAJOR EMPLOYERS IN SOUTH SANTA BARBARA COUNTY Number of Rank Firm Employees 1 University of California at Santa Barbara 10,063 2 County of Santa Barbara 4,383 3 Cottage Health System 2,845 4 Santa Barbara School District 2,531 5 Santa Barbara City College 1,791 6 Raytheon Electronic Systems 1,400 7 Santa Barbara County Education Office 1,029 8 City of Santa Barbara Sansum Medical Foundation Clinic US Postal Service 736 Source: City of Santa Barbara 2013 Comprehensive Annual Financial Report The city of Santa Barbara s unemployment rate for December 2013 was 4.3% (a decrease of 1.1 percentage points from December 2012). The city of Goleta s unemployment rate for the same time period was 3.0% (a decrease of 0.8 percentage points from December 2012). By comparison, Santa Barbara County s unemployment rate was 6.2%, while California s overall rate was 8.3%, and the national rate was 6.7%. Education Education is an integral component of the economy in South Santa Barbara County, with five institutions of higher learning on the South Coast (University of California, Santa Barbara City College, Westmont College, Antioch University, and the Brooks Institute of Photography). Educational organizations constitute four of the top ten employers in South Santa Barbara County. The University of California at Santa Barbara (UCSB) is a top-tier public university founded in 1909 with an undergraduate enrollment of approximately 19,000, which is projected to grow to 25,000 by UCSB is a critical economic engine for the region accounting for $1 billion in annual economic impact, which is 5.3% of the total Santa Barbara County economy, or 11.6% of the South Santa Barbara County economy. 9 The campus sits atop cliffs overlooking the Pacific Ocean and is spread over 1,000 acres near the Santa Barbara Municipal Airport. The city of Goleta surrounds much of the campus, so universityrelated hotel demand is mainly absorbed by lodging facilities located in Goleta. However, compression to the city of Santa Barbara occurs during major school events or conferences. 9 The Regents of the University of California, Vision 2025: University of California Santa Barbara Long Range Development Plan, IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 5

6 MAJOR DEVELOPMENTS High barriers to entry exist for real estate development in both Santa Barbara and Goleta. Land zoned for commercial development is limited and new developments face significant hurdles which often require a lengthy timeline for the approval process. The high cost of land, along with the cost to comply with local regulations and occasional community resistance, can elevate the cost of development, making many projects unfeasible. Other projects have been long stalled in the entitlement process resulting in limited new commercial development. However when compared with the last several years, and with the economy continuing to improve, more development is currently underway, albeit at a protracted pace. Highway 101 Widening The Highway 101 Widening project will expand the freeway from four to six lanes between northern Ventura County and the city of Santa Barbara. The end result will be 16 contiguous miles of two additional lanes, matching the six-lane highway south of Carpinteria and north of Santa Barbara. The project is planned over four phases, which should ease any congestion related to construction. The first phase ended in 2012 and the final phase is expected to conclude in Funk Zone The Funk Zone is a mixed-use neighborhood in downtown Santa Barbara located between the Pacific Ocean and Highway 101. Previously filled with abandoned buildings as recently as two years ago, the district has arguably had the most commercial development in the city of Santa Barbara in the past several years, driven primarily by the local community. The city s code requires developments in the Funk Zone to either be tourist-serving in nature, mixed-use residential/commercial, or marine-oriented light manufacturing. This storied area was previously a marine industrial and manufacturing hub, but now contains wine-tasting rooms, microbreweries, small retail shops, restaurants, art studios, and galleries. Westar Located on 24 acres across from the Camino Real Marketplace in Goleta, the Westar Mixed-Use Village Project plans call for a mix of multi-family residential apartment units and commercial space, including a community shopping center with a drugstore, market, and dining outlets. Construction is underway with the Marketplace slated to open in Cabrillo Business Park The Cabrillo Business Park is a fully entitled, 92-acre planned corporate park with 935,000 ft 2 of office, R&D, and light manufacturing buildings located in Goleta at near the entrance to UCSB. The Park also recently finished construction in 2014 on 192,000 ft 2 of office buildings and a warehouse. This new corporate campus has become the global headquarters for Deckers Outdoor Corporation, the maker of UGG Boots. Other development in the market area over the next 3-4 years that will support the area s economy includes new hospital expansion projects and additional UCSB student housing IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 6

7 HOTEL SUPPLY Lodging supply for the South Santa Barbara County market is concentrated in Santa Barbara and Goleta. It currently includes 64 properties with over 4,600 guestrooms, which constitutes a fairly small hotel base. New hotel supply in Santa Barbara and Goleta has been relatively limited; the newest ground-up developments (excludes conversions of existing hotels) are the Courtyard by Marriott Goleta (2012), the Hampton Inn Goleta (2007), and the Bacara Resort & Spa (2000). The majority of new hotels in the market have been conversions of already existing lodging facilities: the El Encanto Hotel and Garden Villas (2013), Hotel Indigo (2012), and the Hyatt Santa Barbara (2011). Brand new supply in the planning stages accounts for rooms; 479 redeveloped/conversion hotel rooms are also in the pipeline. Recently Completed The El Encanto Hotel and Garden Villas in Santa Barbara was purchased by Orient-Express Hotels for $26.0 million ($313,253 per room) in November 2004 for redevelopment. In September 2006, the property was closed for a complete renovation and expansion with a new spa, pool, fitness center, and nine new guestrooms. The project was stalled because of economic recession woes and challenges maintaining financing for the extensive renovations. Construction on the project resumed in mid-2010 and the resort reopened as a 92-room luxury resort in March The reported cost of the redevelopment project was $108 million (nearly $1.2 million per room). 11 The 41-room Hotel Indigo is a multi-million dollar conversion of the old Hotel State Street, an independent, limited-service hotel. Opened in February 2012, the Indigo is the second newest hotel in the city of Santa Barbara. The Indigo is owned by Santa Barbara Beach House Hotel LP and is located in Santa Barbara s lower downtown area near the Funk Zone. The 106-room Courtyard by Marriott in Goleta opened in August 2012 at a total cost of $28 million (or $264,000 per room). 12 It reportedly took the developer and owner, R.D. Olson Construction, more than nine years for the planning and development process. The hotel is the first ground-up hotel built in Goleta since The Courtyard is located near UCSB and just southwest of the Goleta Technology Park, where many of the area s industrial and tech corporations are based. Proposed The Waterfront Hotel is planned for a site adjacent to the DoubleTree Fess Parker Resort located on Cabrillo Boulevard across from East Beach. Revised plans call for construction of a luxury boutique resort hotel with rooms in two- and three-story buildings. Plans were submitted in September 2013 and, according city planning officials, could take anywhere from 12 to 18 months to work their way through the approval process. The site is being developed by the family of the late Fess Parker, who opened the 360-room DoubleTree. Miramar Beach Hotel and Bungalows will be a luxury 16-acre oceanfront hotel development in Montecito, an unincorporated area just south of Santa Barbara. The former Miramar Hotel has been vacant since 2000, and has struggled through the development process. The current owner, Rick Caurso, is the third developer on this project in less than 10 years. Under Caruso s ownership, the project was originally approved in Current property plans show 186 guestrooms, two pools, restaurants, bars, and a private beach club. The project continues to move forward with no set opening date. 11 Christopher Reynolds, El Encanto Hotel in Santa Barbara Takes a Big Step Up, Los Angeles Times McClatchy Tribune Regional News, April 28, $28 Million Marriott Hotel Opens in Goleta, Pacific Coast Business Times, August 23, IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 7

8 La Entrada is a mixed-use project and incorporates the old Hotel Californian, in Santa Barbara s lower downtown area. The current developer, Michael Rosenfeld, purchased the site from Mountain Funding at the height of the recession for $7 million. Approved plans show a 133-room hotel with public space, retail, and parking. The project is slated to break ground in 2014 and finish in An off-site 34-room expansion of the Harbor View Inn at 101 State Street (across from the La Entrada project) was approved in This expansion is not located on the hotel s main site, but at a second property approximately ¼ mile away. It will still function under the same management team. The expansion is expected to be complete in An extended-stay Marriott Residence Inn with 118 rooms is in the works in Goleta. Current plans are a scaled-down version of the original 140-room plan approved by the city in2008, which has since been rescinded at the request of the developer. The revised proposed development is still in the early planning stages and has not yet been approved. The developer is R.D. Olson Construction (the same developer/owner of the recently opened Courtyard by Marriott Goleta). The proposed selected-service Hilton Garden Inn in Goleta is a reappearance of the Rincon Palms Hotel and Conference Center project that was originally approved by the city in Due to community pushback, revised plans were submitted by developer Daketta Pacific to the city and approved in November New plans call for 138 guestrooms and meeting space. The project is currently in design review and has no set opening date. The independent 160-room Hotel Goleta was purchased by Makar Properties in June Refurbishment and extensive upgrades are scheduled to start in Spring Upon completion, the hotel will be rebranded and operated as a Kimpton hotel, and repositioned as an upscale, boutique hotel (estimated opening Summer 2014). HOTEL MARKET PERFORMANCE The Santa Barbara lodging market is highly seasonal. In the colder winter months, occupancy dips to the high-50/low-60% level. Warmer summer months traditionally show occupancies just shy of 90%. Average rates exhibit similar seasonality, reaching their low in the winter and peak in the summer. As is typical of a leisure-driven market, in Santa Barbara occupancies and average rates are noticeably higher during the weekends than the weekdays. Occupancy in Santa Barbara and Goleta is near its historic peak level and average rate continues to improve. Based on a HVS survey of select lodging facilities in the market, occupancy registered 73.9% in 2013, just shy of its peak in Average rate also registered market record levels in 2013, reaching $223.33, higher than any other year in the past decade. Following these occupancy and average rate trends RevPAR grew 6.9% to $ in Santa Barbara and Goleta s RevPAR levels are nearly double that of the state of California as reported by the California Hotel & Lodging Association and STR, which showed an occupancy level of 70.7% in 2013, while its average rate was $ These trends resulted in 2013 RevPAR levels of $ In the near term, occupancy levels are expected to remain high; as occupancies approach prior peak levels, market participants are shifting their strategies to focus more on average rate growth to increase RevPAR. With limited new hotel rooms anticipated to enter the market and with extensive demand driven by leisure travelers, the momentum of vigorous average rate growth is expected to continue through IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 8

9 2014. Additionally, Visit Santa Barbara is working with a sizeable five-year, $4 million budget 13 and has engaged an aggressive marketing plan to bolster tourism in the area; results have been favorable evidenced by an increase in overall occupied room nights, especially within the market s shoulder periods. Visit Santa Barbara s marketing efforts should further support the market s current momentum. RECENT HOTEL TRANSACTIONS Hotel transactions in Santa Barbara and Goleta are sporadic as the hotel base is relatively small. Because of the limited number of properties, the high barriers to entry as a result of the limited availability of properly zoned land, and an arduous approval process, the per-room sales prices have been relatively high. Because of the strong market performance, many current hoteliers choose to maintain ownership in their profitable assets. SANTA BARBARA HOTEL TRANSACTIONS Property Location Sale Date Price Rooms Price/Rm Overall Cap Hotel Oceana Santa Barbara Mar-14 $41,700, $341, % Hersha Hospitality Trust Hampton Inn Goleta Jan-14 27,900, , % Summit Hotel Properties, Inc. Hotel Goleta Santa Barbara Jun-13 24,000, ,000 Makar Properties, LLC Hyatt, Parkside Inn, 5-Room Villa Santa Barbara Jun-13 61,000, ,000 Chesapeake Lodging Trust Bacara Resort and Spa Goleta Feb ,900, ,611 BRS Ventures, LLC La Quinta Inn & Suites Santa Barbara Oct-12 15,100, , % 1601 State Street Hotel Investors, LP Canary Hotel Santa Santa Barbara Mar-12 43,500, , % Kimpton Hotels & Restaurant Group, LLC Bacara Resort and Spa Goleta Jul ,000, ,667 Ohana Real Estate Investors/Rockpoint Group, LLC, JV Source: HVS Buyer One notable property, the Bacara Resort & Spa, has transacted twice in the past 3 years. A joint venture between Rockpoint Group LLC and Ohana Real Estate Investors acquired the property in 2011 for $105 million, or $292,000 per room. Rockpoint/Ohana invested $27 million in renovations and was successful in improving the resort s profitability. They marketed the resort for sale throughout 2012, and received multiple offers. However, the group declined those offers and continued to operate the resort. As economic conditions further improved in the SoCal resort market and Bacara s profitability strengthened, the property was repositioned and put back on the market, selling in February 2013 to Irvine-based Pacific Hospitality for approximately $184.9 million, or $514,000 per room - a 76% increase over the 2011 transaction. CONCLUSION Leisure-driven Santa Barbara and commercial-driven Goleta have both realized significant growth in the past few years. With its attractive oceanside location and unique appeal, tourism has been a cornerstone of the Santa Barbara market economy. However, Goleta has pursued and benefited immensely by encouraging tech sector business development. The desirability to own, along with this market s high barriers to entry, have contributed to high sales prices in both the American Riviera and Techtopia. With its large surrounding population base and constrained new hotel inventory, the greater Santa Barbara hotel market should thrive for the foreseeable future. 13 Visit Santa Barbara, Destination Strategic Marketing Plan 2013/2014. IN FOCUS: SANTA BARBARA HOTEL MARKET WHERE THE AMERICAN RIVIERA MEETS TECHTOPIA PAGE 9

10 About HVS HVS is the world s leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries. Established in 1980, the company performs assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 30 offices and 450 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. Superior Results through Unrivalled Hospitality Intelligence. Everywhere. HVS LOS ANGELES, established in 2013, is located in the South Bay region of the Los Angeles area and is readily accessible to Southern California s hotel and resort markets. HVS Los Angeles operates under the direction of Senior Managing Director Suzanne R. Mellen and Vice President Leah Dauer Murphy (the on-site practice manager). Our LA team has diverse academic backgrounds and hotel-related experience, with in-depth expertise in the numerous and varied lodging markets of Southern California. About the Author As an Analyst with HVS Consulting & Valuation in Los Angeles, Nordee Saritvanich has evaluated numerous hotel properties in California and throughout the United States. Nordee is wellversed in examining the key metrics and detailed nuances of hotel appraisals and feasibility studies for a wide range of proposed and existing lodging types. Prior to joining HVS, Nordee worked as a credit and equity analyst graduate intern with PB Capital (a member of Deutsche Bank Group) and Time Equities in New York City. Nordee earned his BS degree from the University of California at Irvine and his MS degree with distinction in Real Estate Finance and Investments from New York University. He also has a certificate in Hotel Real Estate Investments & Asset Management from the Cornell University School of Hotel Administration. Nordee speaks conversational Thai, has a black belt in Taekwondo, and enjoys snowboarding.. nordee@hvs.com HVS Los Angeles West 190 th Street, Suite 400, Los Angeles, CA 90248