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HomeMy WebLinkAboutSP 181H; Home2 Carlsbad Suites; EXECUTIVE SUMMARY PRELIMINARY MARKET STUDY; 2015-10-01JAN 0 8 2016 EXECUTIVE SUMMARY PRELIMINARY MARKET STUDY: A PROPOSED HOME2 SUITES IN CARLSBAD, CALIFORNIA HOME Prepared for: Royal Hospitality Carlsbad, LLC P.O Box 3872 6560 Poco Lago Rancho Santa Fe, CA 92067 October 2015 KALLENBERGER JONES & CO. KALLENBERGER JONES & CO. 245 Fischer Avenue, Suite A-7 • Costa Mesa, California 92626 • tel (714) 433-2020 October 12, 2015 Mr. Koong Cho Royal Hospitality Carlsbad, LLC P.OBox 3872 6560 Poco Lago Rancho Santa Fe, CA 92067 Dear Mr. Koong Cho: The accompanying report presents an executive summary that contains a recap of our research and analysis of the potential market support for a proposed 142-room Home2 Suites hotel in Carlsbad, California. Included herein are analyses of the site, the local hotel market, and the market position of the proposed hotel. These analyses contribute to estimates of its occupancy and average room rate. This executive summary is for your use in evaluating the market potential of the proposed hotel. Its use and interpretation is subject to the restrictions set forth in all engagement letters for the consulting services that we provide you. This executive summary is based on our fieldwork and analysis undertaken in June 2015. We have enjoyed working with you and we would be pleased to assist you in the interpretation and application of our findings. Yours very truly, Mark Kallenberger, ISH C TABLE OF CONTENTS page Introduction 1 Site Evaluation 2 Area Review 4 The Hotel Market 9 The Proposed Home2 Suites 16 Estimated Performance of the Proposed Home2 Suites 18 INTRODUCTION Background Royal Hospitality Carlsbad, LLC has proposed the development of a Home2 Suites by Hilton hotel on a site located northeast of the intersection of Palomar Airport Road and Palomar Oaks Way in Carlsbad, California. This hotel is hereinafter referred to as the Proposed Hotel. As part of the development process, Kallenberger Jones & Co. was engaged to prepare a study of the potential market demand for this hotel in support of a forecast of its occupancies and average room rates. The Scope of the Assignment The scope of the assignment included the following key tasks: Site Evaluation. An evaluation of the proposed site in terms of access, traffic levels, visibility, ambience, relationship to demand generators, and other relevant factors to determine how the location is likely to affect the market appeal of the Proposed Hotel. Area Review. An analysis of the relevant general economic and tourism conditions in the region as they relate to hotel demand at the proposed site. Competitive Supply. An assessment of the hotels which are likely to be the primary competitors of the Proposed Hotel. Market Demand. An analysis and forecast of demand patterns in the defined competitive market, including market segmentation, seasonality, timing and unsatisfied demand. Market Penetration Analysis. An assessment of the prospective market position of the Proposed Hotel, including analyses of its relative market appeal, which would incorporate assumed strategies of franchise affiliation, quality of development, room rates, services and amenities. Estimated Occupancy and Average Rate. A forecast by market segment of the occupancy and average daily rate attainable by the Proposed Hotel in its first five years of operation. Use Restrictions This report and the contents thereof do not constitute a recommendation that might affect a decision whether or not to finance or invest in the Proposed Home2 Suites. Any such decision is the sole responsibility of any such financier or investor. Moreover, the scope of the assignment did not include a comprehensive assessment of the feasibility of the project, which would require an analysis of its projected financial performance and development costs. This executive summary is based on our fieldwork and analysis undertaken in June 2015. SITE EVALUATION Location The site of the Proposed Hotel ("Hotel Site") is located in Carlsbad, which is a coastal city in northern San Diego County. It is approximately 35 miles north of San Diego and 3 miles east of the Pacific Ocean and its beaches. The neighboring cities include Oceanside to the north, Vista to the northeast, San Marcos to the east, and Leucadia and Encinitas to the south. The Hotel Site is approximately two miles east of Interstate 5 (1-5), which runs in a north/south direction and is the major coastal route in the western United States. State Route 78 (SR-78), which is a short freeway that extends from Oceanside to Escondido and passes through the cities of Vista and San Marcos, is located roundly 6 miles north of the Hotel Site. Palomar Airport Road is a major thoroughfare in the region. It is lined with business parks, retail centers, and other major commercial and residential developments. The terrain in much of this region consists of gently rolling hills. Neighborhood McClellan-Palomar Airport ("Palomar Airport"), which is located two blocks southwest of the Hotel Site, is surrounded by business parks. The Hotel Site is near these and other generators of demand for hotel rooms, as shown in the aerial photo below. (The Hotel Site is outlined in red.) The Hotel Site is situated northeast of the intersection of Palomar Airport Road and Palomar Oaks Way. The business parks near the Hotel Site are largely developed, as shown in the previous aerial photo. Other business parks that are located farther east of Palomar Airport in Carlsbad and Vista have more vacant pads that are suitable for industrial and office development. -2- The Hotel Site is approximately three miles east of the sandy beaches of Carlsbad and 1.6 miles southeast of the Legoland theme park. These two tourist attractions generate significant demand for the local hotels. Residential land uses line many of the secondary streets in the neighborhood, especially in areas located south of the Hotel Site. The Carlsbad Premium Outlets shopping center, which has 90 stores in 289,000 square feet, is located just northeast of the intersection of 1-5 and Palomar Airport Road, and various small shopping centers line Palomar Airport Road within a few miles of the Hotel Site. Access and Visibility Air Access. The driving distance from the Hotel Site to the main terminal of Palomar Airport is only 1.4 miles. Therefore, arriving air passengers would find access to and from the Proposed Hotel to be very convenient. Surface Access. The Proposed Hotel would be located two miles east of 1-5, which would somewhat limit its appeal to "impulse customers" on long-haul trips. However, many of the local hotels are located a similar or greater distance from 1-5, and their customers often make reservations and/or are seldom dissuaded by the off-freeway locations of these existing hotels. Visibility. The Proposed Hotel would be readily visible from Palomar Airport Road. Relationship to Demand Generators At present, the most prominent generators of demand for hotel rooms in the vicinity of the Hotel Site are the many office and industrial tenants that populate the surrounding business parks. Other major demand generators are presented in the following table. MAJOR DEMAND GENERATORS Demand Generator Various business parks McClellan-Palomar Airport Legoland theme park Carlsbad Premium Outlets Flower Fields Interstate 5 Carlsbad beaches So Cal Sports Complex Source: Google rvlaps Distance from Hotel Site abutting to 5 miles 1.4 miles 1.6 miles 1.8 miles 1.9 miles 2.0 miles 3 miles 10miles Direction all directions west west west west west west north These demand generators will be described in greater detail in the Area Review section on the following pages. Conclusion The Hotel Site is well-suited to the development of the Proposed Hotel due primarily to its location in the midst of significant existing and planned office and industrial development and to its proximity to Palomar Airport. Also, local beaches and the Legoland theme park, which generate significant demand for hotel rooms, are within a few miles of the Hotel Site. -3- AREA REVIEW The Proposed Hotel should attract most of its customers from businesses located in the cities of Carlsbad, Vista, and San Marcos. Therefore, the analysis in this section focuses on this trade area. Employment Trends As with most of California, the job market in Carlsbad has improved in recent years, as evidenced by recent trends in employment and unemployment rates in Carlsbad, Vista, and San Marcos, which are presented in the table below. LOCAL EMPLOYMENT TRENDS Carlsbad Vista San Marcos Year Employment Change Unemp. Rate Employment Change Unemp. Rate Employment Change Unemp. Rate 2008 45,700 3.9% 45,000 6.7% 28,900 6.0% 2009 44,200 -3.3% 6.4% 43,400 -3.6% 10.7% 27,900 -3.5% 9.6% 2010 46,600 5.4% 9.8% 38,300 -11.8% 9.6% 34,100 22.2% 8.5% 2011 47,200 1.3% 9.4% 38,700 1.0% 9.2% 34,500 1.2% 8.2% 2012 48,400 2.5% 8.3% 39,700 2.6% 8.2% 35,400 2.6% 7.2% 2013 49,100 1.4% 7.1% 40,300 1.5% 6.9% 36,000 1.7% 6.1% 2014 49,900 1.6% 5.8% 40,900 1.5% 5.7% 36,500 1.4% 5.0% 2015 June 51,300 2.8% 4.5% 42,100 2.9% 4.4% 37,500 2.7% 3.9% Source: California 8nployrrent Developrrent Departrrent As indicated in this table, the unemployment rate in Carlsbad increased from 3.9 percent in 2008 to 9.8 percent in 2010, but has declined every year since, and it was 4.5 percent in June 2015. Unemployment rates in Vista and San Marcos exhibited similar patterns. Business Clusters The economy of the North County area is dominated by the office and industrial development in the business parks that surround McClellan-Palomar Airport ("Palomar Airport".) The major industry clusters in this area include biotechnology, information and communications, eco-technology, sports equipment manufacturing, and apparel manufacturing. Major tourism attractions are in Carlsbad, including beaches, the Legoland theme park, and attractive flower fields. Also, the North County area benefits from the established tourism flow to San Diego. Characteristics of the major business clusters are presented in the following table. TOP BUSINESS CLUSTERS IN CARLSBAD EmQio~ees Establishments Growth (2012-2014) Average Earnings Hospitality and tourism 14,776 151 13% $25,469 Life sciences 6,546 155 9% $126,566 Action sports manufacturing 2,890 39 5% $95,931 Information and communications technology 9,999 294 0.2% $121,320 Clean technology 4,693 54 8% $120,289 Source: City of Carlsbad, BW Research 2015 Business Survey Report -4 - As indicated in this table, hospitality and tourism has the most employees, the highest growth rate, and the lowest average earnings of the top business clusters. The remaining four sectors have lower growth rates but very high average earnings. Technology companies, including those involved in life sciences, information, and communications, are also found in the business parks in Vista and San Marcos. Office Market North County. Trends in the North County office market are presented in the following table. OFFICE TRENDS: NORTH COUNTY Year Available* Vacancll Net absor(;!tion* Under Construction* 2007 9,942,033 17.7% 424,316 895,143 2008 10,203,152 20.9% (113,155) 260,709 2009 10,198,365 22.0% 108 90,000 2010 10,306,982 22.5% 110,637 162,143 2011 10,335,690 18.5% 290,350 0 2012 10,224,908 16.9% 168,553 0 2013 10,195,610 15.5% 16,773 33,917 2014 10,270,755 15.7% 211,472 0 2015** 10,276,781 15.3% 31,008 0 *square feet of rentable space **year-to-date March Source: Cushman & Wakefield This market has exhibited consistent annual increases in net absorption since 2003, with the sole exception of 2008. The vacancy has dropped from its peak of 22.5 percent in 2010 to its current level of 15.3 percent. This drop is due not only to continued absorption but also the lack of new office development since 2010. In spite of the falling vacancy rate, there exists sufficient rentable office space to accommodate new tenants for several years Carlsbad. The office market in Carlsbad accounts for about half of the office space in the North County area, as shown in the following table. OFFICE TRENDS: CARLSBAD Year Available* Vacancl£ Net absor(;!tion* Under Construction* 2007 5,116,109 24.8% 366,359 767,936 2008 5,166,689 25.7% (42,819) 50,580 2009 5,111,789 27.0% 7,741 40,000 2010 5,165,525 26.9% 68,153 79,238 2011 5,181,188 22.0% 196,055 0 2012 5,107,867 19.4% 126,032 0 2013 5,111,242 16.5% 69,145 0 2014 5,136,351 16.8% 140,508 0 2015** 5,142,106 17.4% (21 ,255) 0 * square feet of rentable space **year-to-date March Source: Cushman & Wakefield -5- While the vacancy rate in Carlsbad is higher than that in the North County area, the trends in absorption and construction in the two areas are very similar. Typically, high vacancy rates precipitate lower rental rates, which then induces new leasing and higher net absorption. This outcome would cause concomitant increases in the demand for hotel rooms. Industrial Market North County. Key indicators of the local industrial market are presented in the table below. INDUSTRIAL TRENDS: NORTH COUNTY Year Available* Vacancll Net absor[ltion* Under Construction* 2007 50,347,642 9.1% 583,445 1,306,796 2008 50,727,881 10.4% 155,813 357,073 2009 51,317,120 12.5% (552,103) 557,655 2010 51,872,206 11.5% 291,709 286,770 2011 52,304,650 11.2% 103,929 211,976 2012 52,933,160 11.0% 135,242 0 2013 53,122,553 9.2% 782,757 0 2014 53,121,206 6.9% 1,297,325 69,827 2015** 53,156,564 6.3% 336,529 134,262 • square feet of rentable space **year-to-date March Source: Cushman & Wakefield The North County industrial market is large, as it encompasses approximately 53.1 million square feet of space. The vacancy rate increased only slightly in the recent recession, and has fallen from its peak of 12.5 percent in 2009 to 6.3 percent in March 2015. Carlsbad. The industrial market in Carlsbad, which encompasses approximately 14.3 million square feet, accounts for about 27 percent of the industrial space in the North County area. Key indicators of this market are presented in the following table. INDUSTRIAL TRENDS: CARLSBAD Year Available* Vacancl£ Net absorQtion* Under Construction* 2007 13,833,413 15.9% 178,273 523,969 2008 13,957,299 16.8% 163,717 123,886 2009 14,017,540 17.4% 106,429 113,535 2010 14,077,984 14.9% 19,023 0 2011 14,310,280 14.6% (54,090) 176,000 2012 14,395,856 14.4% (38,721) 0 2013 14,410,167 11.6% 366,171 0 2014 14,257,080 10.7% 160,096 77,400 2015** 14,293,625 9.6% 188,032 77,400 *square feet of rentable space **year-to-date March Source: Cushman & Wakefield - 6 - As shown in this table, the industrial vacancy rate in Carlsbad, while still higher than that of the North County area, has declined to 9.6 percent, which is lower than the pre-recession level of 15.9 percent in 2007. Net absorption of industrial space increased significantly in 2013 and this growth pattern continued in 2014 and 2015. The improving industrial market contributed to the new construction in 2014. Development Outlook Most of the major business parks that surround Palomar Airport have vacant parcels that are zoned and suitable for office and industrial development. Local real estate brokers estimated that several hundred acres of such developable parcels are available, and they expect that development will resume soon. In general, Carlsbad, Vista, and San Marcos welcome the commercial development that supports the local economy, and these cities have identified preferred development areas. The most prominent public development project in North County is the $1 billion Carlsbad Desalinization Plant, which is under construction and is due to be completed in 2016. This project should continue to generate some demand for hotel rooms from visiting administrators, engineers, construction personnel, and others involved in the project. Caruso Affiliated, a commercial developer known for two very successful entertainment-oriented shopping centers (The Grove in Los Angeles and The Americana at Brand in Glendale), is pursuing a similar project on a 203-acre landholding located northeast of the intersection ofl-5 and Cannon Avenue in Carlsbad. Nordstrom has agreed to anchor the project in a two-level, 123,000-square-foot space. The owners of the existing Carlsbad by the Sea Hotel, with its distinctive freeway-side windmill, announced plans to raze the hotel and develop a retail complex in its stead. This project seems to have been delayed by the current strong hotel market and the customary obstacles of a major redevelopment of this type. Palomar Airport Palomar Airport, which is located 1.4 miles northwest of the Proposed Hotel, is a small regional airport that serves northern San Diego County. Its terminal, which contains customs and immigration facilities, opened in 2009. Its runway is only 4,897 feet in length, which limits its landings to 72-seat airplanes. The airport authority has commissioned a study of the potential capital improvements to the airport, but any major runway extension would be on a landfill; consequently, it would require a lengthy evaluation and permit process. At present, Palomar Airport accommodates one commercial airline, BizAir Shuttle, which has two scheduled flights per day to Los Angeles and is to add three flights per week to Las Vegas, beginning July 30, 2015. General aviation at Palomar Airport accounts for approximately 140,000 take-offs and landings each year, each of which carries an average of2.9 passengers. A recent proposal by a new carrier, California Pacific Airlines, was rejected by the Federal Aviation Administration, and it has been abandoned. However, the airport authority is reviewing an application submitted by an established carrier that would involve 12 new flights per day using three 70-passenger jets on routes to Phoenix, Las Vegas, San Jose, Oakland, San Francisco, and Cabo San Lucas. The carrier anticipates accommodating approximately 200,000 enplanements per year. The general manager of the airport reported that an Environmental Impact Report involving this new air service is underway. - 7 - Tourism The North County area benefits from the many tourism resources and attractions in San Diego County. A large number of tourists travel from Los Angeles and Orange Counties to San Diego, and most use Interstate 5, which passes through Carlsbad. As a result, tourists patronize hotels, restaurants, and the major attractions in Carlsbad. The major tourist attractions in the North County area are the Legoland theme park in Carlsbad and the local beaches, including Carlsbad State Beach. Legoland. This 128-acre amusement park, which lies northeast of the junction of Palomar Airport Road and Interstate 5 in Carlsbad, opened in 1999. It is geared to young children, and it has more than 60 rides and attractions, including numerous sculptures constructed of Lego blocks. It has been regularly expanded and improved in recent years, which has promoted consistently increasing attendance. Legoland management does not release attendance data, and the last published estimate of Legoland attendance was for 2006, when the Themed Entertainment Association reported it to be 1.66 million. The General Manager of Legoland reported that the park had recorded ten straight years of increasing attendance. Based on this information, it appears that the annual attendance was more than 2 million in recent years. Other Local Attractions and Events. The Carlsbad Flower Fields and the Carlsbad Premium Outlets are secondary tourist attractions that cater primarily to day visitors. The Flower Fields, which are located northeast of the intersection of I-5 and Palomar Airport Road, bloom from March to May and regularly draws 200,000 visitors annually. The Carlsbad Premium Outlets, which attract more than 8 million shoppers per year, are a 90-store complex located near the Flower Fields; the great success of this outlet mall has encouraged other retail developments, including the aforementioned Caruso project and the redevelopment of the Carlsbad by the Sea Hotel. A number of special events are held in Carlsbad and surrounding cities, the most prominent of which is Art Splash, which occurs over two days each autumn and reportedly attracts 30,000 attendees. This event, which features sidewalk chalk drawings of classical paintings, is located on Armada Drive, near Palomar Airport Road. The SoCal Sports Complex, which has 20 soccer fields, opened in Oceanside in 2014. As planned, this venue would host 23 major sports tournaments, including 16 soccer events. Major youth soccer tournaments can draw hundreds of teams, many of which require overnight lodging. As a result, this facility should boost the occupancy ofhotels in not just Oceanside but also Carlsbad on select weekends. Economic Outlook The local economy is in a developing recovery, as unemployment rates have dropped significantly and office and industrial net absorption has exhibited regular increases. The forces behind much of the growing local economy appear to be the expanding national and state economies and particularly the flourishing high-tech and tourism sectors. Major local developments that are underway or imminent and that should boost the local economy and increase the demand for hotels rooms include: • continued absorption of office and industrial space in the region. • continued addition of attractions to Legoland. • the surge in passenger arrivals at Palomar Airport that could accrue from new airline service. • the construction of the $1 billion Carlsbad Desalinization Plant. • the development of the 20-field soccer complex in Oceanside. In addition, the improvements to Palomar Airport that may result from current planning efforts and the proposed Caruso entertainment complex could generate new demand for hotel rooms in the long term. -8- THE HOTEL MARKET Hotel Classes The hotels in Carlsbad are segregated into the classification system of Smith Travel Research (STR) and the equivalent system of Expedia in the following table. ·. HOTEL CLASSES: CARLSBAD STR Hotel Class E292edia Hotels Total Rooms Economy 1-star 9 673 Midscale 2-star 2 231 Upper Midscale 2.5-star 6 512 Upscale 3-star 9 1,067 Upper Upscale 4-star 6 1,242 Luxury 5-star ~ 667 total 36 4,392 Source: Smith Travel Research In general, the characteristics of hotel customers in Carlsbad differ significantly in most of the foregoing hotel classes. The upper upscale and luxury (4-and 5-star) hotels in Carlsbad have restaurants, meeting facilities, and resort facilities such as spas; they attract high proportions of affluent leisure guests and meeting groups. The upper midscale and upscale (2.5-and 3-star) hotels usually have limited food and beverage facilities and negligible meeting space. These hotels attract more individual business travelers that seek moderately-priced lodging and are subject to corporate travel cost constraints. The Proposed Home2 Suites would be an upper midscale (2.5-star) hotel, and other brands in this class are Hampton Inn, Fairfield Inn, TownePlace Suites, and Holiday Inn Express. Upscale (3-star) hotels include Courtyard by Marriott, Hilton Garden Inn, Holiday Inn, Residence Inn, Homewood Suites, Staybridge Suites, and Hyatt House. The largest upper upscale hotels in Carlsbad are the 607-room Omni La Costa Resort and the 250-room Sheraton, both of which are resorts with spa facilities. These classification systems are very important to hotel customers, because they provide an indication of the scope of the facilities of the hotel and strong evidence of the room prices. The average prices of the various classes of hotels in Expedia are presented in the following table. AVERAGE QUOTED ROOM RATES IN CARLSBAD Tuesday Thursday Saturday Stars 11/17/2015 11/26/2015 12/5/2015 Five $293 $361 $251 Four $181 $303 $209 Three $139 $225 $159 All hotels $122 $163 $130 Source: Expedia - 9 - As indicated in the previous table, the room prices of 4-star hotels are $42 to $78 higher than those of the 3-star hotels in the Carlsbad area. The gap between 2.5-star hotels (such as the Home2 Suites) and 4-star hotels would be significantly greater. These wide gaps provide evidence of the significant differences in the market appeal and customer characteristics of the hotels in the various classes. Competitive Hotels The primary competitors of the Proposed Home2 Suites would be upper midscale hotels located in Carlsbad, Vista, and San Marcos, and the secondary competitors would be upscale properties. A summary of selected major attributes of the 14 properties that meet these criteria ("the competitive set") is presented in the following table. EXISTING COMPETITIVE HOTELS Distance from Site Hotel .Ql!y STR Class 012ened Rooms Miles Direction Upscale Extended-stay Residence Inn Carlsbad Upscale Jul1999 121 2.1 northeast Homewood Suites Carlsbad Upscale Feb 2008 145 1.2 northeast Residence Inn San Marcos Upscale Jul2010 112 7.1 northeast Hyatt House Carlsbad Upscale Dec2001 97 3.0 northwest Staybridge Suites Carlsbad Upscale Apr2015 106 1.9 northeast sub-total 581 Select-service: Hilton Garden Inn Carlsbad Upscale Jun 2000 161 2.9 west Courtyard Carlsbad Upscale Jun 2000 145 0.7 northeast Hyatt Place Vista Upscale Jul2012 150 4.2 northeast Carlsbad By The Sea Carlsbad Upscale Jun 1983 146 2.0 west Holiday Inn Carlsbad Upscale Mar2015 133 14.9 northeast sub-total 735 Upper Midscale: Hampton Inn Carlsbad Upper Midscale Dec2007 94 1.2 northeast Hampton Inn San Marcos Upper Midscale Jun 2001 69 8.6 northeast TownePiace Suites Vista Upper Midscale Jun 2010 94 5.7 northeast Fairfield Inn & Suites Carlsbad Upper Midscale May2015 96 0.2 south sub-total 353 Total Rooms 1,669 Source: Kallenberger Jones & Co., Srrith Travel Research, Google maps As indicated in this table, this competitive set consists of five upscale extended-stay hotels that altogether have 581 guest rooms, five select-service properties that have 735 guest rooms, and four upper midscale hotels that have 353 guest rooms. The lesser number of rooms in the upper midscale category suggests that this segment is under-represented in this market. The five upscale extended-stay hotels, which have large guest rooms with full kitchens, are designed to appeal to guests that stay for long periods, and extended stays are commonly defined as five nights are longer. The five select-service hotels are designed to appeal to individual business travelers on short stays. These hotels typically have some food, beverage, and meeting facilities. Often, parking, Internet, and other hotel services are complimentary. The room rates of these hotels are typically lower than full- service hotels. The four upper midscale hotels do not have restaurants and have very small, if any, meeting facilities. All offer complimentary breakfast and Internet services. -10- All but two of the competitive hotels were built after 2000, and the Fairfield Inn opened in May 2015. In general, all of the competitive hotels are in good condition Supply Forecast Proposed Hotels. The Proposed Home2 Suites and two other hotel projects (a SpringHill Suites near Carlsbad Beach and a Fairfield Inn & Suites in San Marcos) seem likely to be built soon in this market area. These projects are discussed in the following paragraphs. A 1 04-room SpringHill Suites by Marriott has long been proposed by DKN Hotels on a site located at 3136 Carlsbad Boulevard, which is one block east of Carlsbad Beach. This project involves razing the existing Surf Motel, which would significantly increase the overall costs of this development. Although it is fully entitled, this hotel project has not made significant progress since its municipal approval in 2008, but a hotel official reported that its development would commence after August 2015. This project may be tenuous due to its higher development costs and the lack of progress in recent years, and it would cater mostly to beach visitors. Nevertheless, it is assumed herein that it would be indirectly competitive with the Proposed Home2 Suites and it would open in January 2017. A 118-room Fairfield Inn & Suites is planned in the Corner@2 Oaks project that is located southwest of Twin Oaks Valley Road and San Marcos Boulevard in San Marcos. The retail and hotel portion of this multi-use project have received municipal approvals. However, the progress on this project has been uneven and its opening date is uncertain. Nevertheless, it is assumed herein that this hotel would open in early 2018. A number of other hotel projects seem unlikely to be developed soon or would not be competitive with the Proposed Home2 Suites. These projects are discussed hereinafter. The City of Carlsbad recently entered into a ground lease arrangement with Grand Pacific Resorts involving a city-owned 3 .15-acre property that is located adjacent to the Sheraton Carlsbad. Grand Pacific Resorts plans to initially build 71 hotel rooms that would then be combined with 129 existing rooms at the Sheraton. These 200 rooms, along with the existing Sheraton conference center, restaurant and lobby area, are to be rebranded as a Westin hotel. The remaining 121 existing Sheraton rooms would join 79 new rooms, a new lobby area and related amenities under the Sheraton brand. Either 32 timeshare units or 32 additional Westin hotel rooms are planned in a second phase. At present, the Sheraton is not competitive with the hotels in the competitive set due to its much higher room rates, its full- service amenities, and other factors. As planned, it appears that the Sheraton will have some new facilities, which should contribute to even higher room rates and make it even less competitive with the competitive set. The planned Westin would have higher room rates than the Sheraton, thereby also rendering it non-competitive. The existing 146-room Carlsbad by the Sea Hotel, which occupies a large parcel of land, is the subject of redevelopment plans that would involve demolishing the existing hotel and replacing it with a retail complex. While local real estate executives and city officials are aware of this project, the owner has not fully embarked on the necessary entitlement process. The hotel opened in 1983, has a dated two-story design, and is exhibiting signs of its age. While this redevelopment project is based on the advanced age of the hotel and its proximity to existing and planned retail developments, the hotel market continues to flourish, which seems to have prompted the owners to delay the project. Since this project is uncertain, its redevelopment has not been considered in the subsequent forecast of future hotel supply. -11 - A 39-room hotel project, which would include 12 condominiums and a restaurant, is proposed on a site in Carlsbad Village. This project received the necessary entitlements in 2008, but has remained dormant since then. It is assumed herein that this project would not be built in the next few years. The San Marcos University District Specific Plan allows the development of 400 hotel rooms, but this project has made little progress for many years and has no hotel developer. Supply Forecast. Three hotels opened in 2015, and three others are assumed to be built by 2018. The proposed 142-room Home2 Suites and the SpringHill Suites Carlsbad are assumed to open in January 2017, and the 118-room Fairfield Inn & Suites is projected to open in January 2018. Also, "uncertain additions" equivalent to 75 new hotel rooms were forecast to open annually after 2018, which would allow for hotel projects that may surface in the future. As in any forecast, future development is uncertain, and even hotel projects that receive entitlements are often delayed and/or occasionally abandoned due to such obstacles as cost increases, changing market conditions, and financing difficulties. Hotel Market Trends and Characteristics Trends. The historical occupancies, average room rates (ADRs), and revenues per available room (RevPARs) of the hotels in the competitive set are presented below. RECENT MARKET TRENDS Average Room Rate RevPAR Year OccuQancl£ Amount Change Amount Change 2009 75.6% $131.40 $99.28 2010 75.6% $123.18 -6.3% $93.14 -6.2% 2011 75.6% $127.09 3.2% $96.11 3.2% 2012 75.5% $126.45 -0.5% $95.49 -0.6% 2013 78.1% $125.46 -0.8% $97.97 2.6% 2014 81.6% $131.27 4.6% $107.13 9.4% YTD Mar2015 82.4% $127.69 7.4% $105.20 10.2% YTD Mar2014 80.3% $118.90 3.2% $95.44 10.8% Source: Smth Travel Research As indicated in this table, the occupancies of the competitive set remained high, even through the recent recession, and exceeded 80 percent in 2014 and early 2015 Performance by Hotel Type. Key performance measures of the three defined hotel classes (extended-stay, select-service, and upper midscale) are presented in the following table. PERFORMANCE BY HOTEL TYPE: 2014 Extended-Stay Select-Service Upper Midscale All Hotels Number of Rooms 475 602 257 1,334 Occupancy 85.0% 77.0% 86.0% 81.6% Average Room Rate $135.53 $134.04 $117.67 $131.27 RevPAR $115.22 $103.28 $101.22 $107.14 Source: Kallenberger Jones & Co. -12- As shown in this table, the extended-stay hotels realized a very healthy occupancy (85.0 percent) and the highest RevPAR ($115.22) in 2014. The upper midscale hotels realized the highest occupancy (86.0 percent) and a RevP AR that was only slightly lower than that of the select-service hotels. The Proposed Home2 Suites would be an upper midscale extended-stay hotel and therefore would have features of both of these very successful hotel types. Seasonality. Hotel occupancies and average room rates of the competitive hotels are very high in the summer months of June, July, and August, when tourist travel is heaviest. During this period, many of the hotels are full and prospective customers are forced to find lodging in hotels outside of the trade area. Also, most hotels perform well in March, April, May, August, September, and October, when business travel is consistent and uninterrupted by holidays, and when some leisure travel occurs, especially on warm days. The market is weakest from November through February, when leisure travel abates due to cold weather and when commercial travel slumps during winter holidays. Even in this slow season, monthly occupancies were higher than 69 percent, which provides evidence of the strength of this market. These seasonality patterns are evident in the table below. MONTHLY PERFORMANCE PATTERNS: 2014 Averaee Room Rate RevPAR Month Occu~anc~ Amount Change Amount Change January 69.3% $111.43 0.3% $77.21 10.0% February 77.9% $115.05 1.6% $89.58 12.3% March 86.6% $121.36 3.7% $105.12 5.5% April 87.3% $125.68 6.3% $109.76 16.1% May 80.8% $127.11 5.6% $102.72 10.4% June 88.8% $146.16 7.6% $129.75 9.4% July 92.7% $172.87 5.4% $160.21 4.3% August 92.0% $161.19 7.9% $148.36 10.0% September 76.5% $121.04 3.0% $92.56 6.5% October 82.0% $120.36 5.7% $98.67 13.0% November 74.5% $118.08 3.6% $87.99 8.3% December 70.6% ~115.67 5.3% $81.69 10.9% average 81.6% $131.27 4.6% $107.13 9.4% Source: Srrith Travel Research Day-of-Week Patterns. The performance of the competitive hotels in the twelve-month period ending March 15, 2015 is presented in the following table. DAY OF WEEK PATTERNS Da~ Occu(;!ancy Average Room Rate RevPAR Sunday 68.7% $129.25 $88.78 Monday 80.7% $132.70 $107.06 Tuesday 84.9% $135.00 $114.66 Wednesday 85.5% $135.22 $115.60 Thursday 81.4% $132.85 $108.09 Friday 84.3% $134.65 $113.56 Saturday 90.7% $136.58 $123.87 Source: Smith Travel Research -13- As indicated in this table, the occupancy and ADR in this market are highest on Saturday, which is due to the very strong tourist appeal of Carlsbad and particularly the expansion of Legoland. As in most hotel markets with many corporate customers, the occupancies and ADRs of the competitive hotels are also high on Tuesdays and Wednesdays. Also, RevP ARs are lowest on Sundays, when leisure travel is weak; however, the Sunday room rates do not slide much because most of the Sunday customers are commercial travelers that visit local offices on Monday morning. Reconciliation of Supply and Demand The estimated demand, expressed in room nights, lS compared to the room nights available from the existing and proposed hotels in the table below. SUPPLY AND DEMAND ANALYSIS (in room nights) Market Area: Carlsbad, California 2014 2015 2016 2017 2018 2019 2020 2021 2022 Commercial 5.5% 5.0% 5.0% 5.0% 4.5% 4.0% 3.5% 3.5% Total Gross Demand 307,300 324,200 340,400 357,600 375,500 392,400 408,300 422,600 437,400 Less: Unsatisfied Demand 27,900 25,000 17,000 3,000 2,000 2,000 2,000 2,000 2,000 Net Demonstrated Demand 279,400 299,200 323,400 354,600 373,500 390,400 406,300 420,600 435,400 Plus: Induced Demand 0 4,100 6,500 11,300 13,600 15,000 16,400 17,800 19,200 Total Demand Commercial 279,400 303,300 329,900 365,900 387,100 405,400 422,700 438,400 454,600 Growth over Previous Year 8.6% 8.8% 10.9% 5.8% 4.7% 4.3% 3.7% 3.7% % ofTotal Marke!Demand 70% 70% 70% 70% 70% 70% 70% 70% 71% Leisure 3.5% 3.5% 3.5% 3.5% 3.0% 3.0% 3.0% 3.0% Gross Demand 135,700 140,400 145,300 150,400 155,700 160,400 165,300 170,300 175,500 Less: Unsatisfied Demand 17,700 14,000 9,500 3,000 2,000 2,000 2,000 2,000 2,000 Net Demonstrated Demand 118,000 126,400 135,800 147,400 153,700 158,400 163,300 168,300 173,500 Plus: Induced Demand 0 3,500 5,600 9,700 11,600 12,800 14,000 15,200 16,400 Total Demand Leisure 118,000 129,900 141,400 157,100 165,300 171,200 177,300 183,500 189,900 Growth over Previous Year 10.1% 8.9% 11.1% 5.2% 3.6% 3.6% 3.5% 3.5% % ofTotal Market Demand 30% 30% 30% 30% 30% 30% 30% 30% 29% TOTALMARKETDEMAND Total Gross Demand 443,000 464,600 485,700 508,000 531,200 552,800 573,600 592,900 612,900 Less: Unsatisfied Demand 45,600 39,000 26,500 6,000 4,000 4,000 4,000 4,000 4,000 Net Demonstrated Demand 397,400 425,600 459,200 502,000 527,200 548,800 569,600 588,900 608,900 Plus: Induced Demand 0 7,600 12,100 21,000 25,200 27,800 30,400 33,000 35,600 Total Marke!Demand 397,400 433,200 471,300 523,000 552,400 576,600 600,000 621,900 644,500 Growth over Previous Year 9.0% 8.8% 11.0% 5.6% 4.4% 4.1% 3.7% 3.6% SUPPLY (Room Nights) 486,910 564,290 610,645 701,895 744,965 772,340 799,715 827,090 854,465 Growth over Previous Year 15.9% 8.2% 14.9% 6.1% 3.7% 3.5% 3.4% 3.3% MARKET OCCUPANCY 82% 77% 77% 75% 74% 75% 75% 75% 75% • compound annual Qrowth rate The very strong hotel market in 2014, as evidenced by the high market occupancy of 82 percent, resulted in many days when local hotels were full, especially in the summer. As a result, many hotel customers that would have preferred to stay in hotels in Carlsbad were forced to find alternative accommodations in neighboring cities. As indicated in the previous table, the unsatisfied demand for hotel rooms in this market in 2014 was estimated to be 45,600 room nights. Much of this unsatisfied demand would be captured by the new hotels that open in the next few years. This analysis concludes that the aggregate (market) occupancy, which was 81.6 percent in 2014, will dip to 74 percent in 2018 due mainly to the development of six new hotels. As is customary, the occupancies of new hotels typically "ramp up"; that is, they suffer from common start-up problems that depress occupancies in the first year or two of operation. Thereafter, the market is assumed to reach an equilibrium level of 75 percent, as the regular increases in the demand for hotel rooms are assumed to be offset by new hotels that are developed. -14- CAGR* (2014-2022) 5.6% 5.4% 5.5% 6.4% On the whole, the recent and forecast occupancies are indicative of a very healthy hotel market. In comparison, the average nationwide occupancy was 64.4 percent in 2014, and the average daily room rate was $115.32, according to Smith Travel Research. -15- THE PROPOSED HOME2 SUITES Hotel Concept The Proposed Home2 Suites would be a 142-room extended-stay hotel that is commonly classified as an upper midscale property (by Smith Travel Research) or its equivalent 2.5-star (by Expedia). In general, extended-stay hotels have a number of characteristics that often contribute to their market appeal, including the following: • Many successful extended-stay hotels are not located near major freeways or busy thoroughfares because most long-staying guests prefer peaceful, residential settings, especially in upscale neighborhoods. • Extended-stay hotels are often able to achieve high occupancies on weekends because of the high proportion of guests that stay seven days or longer. • In general, extended-stay hotels realize higher profit margins than most other types of hotels because they have significant market appeal, they often realize higher occupancies, and their operating expenses can be lower due to many cost savings that accrue from extended-stay guests. • Most extended-stay hotels have grounds that include a significant pool, a barbeque area, and other amenities. Planned Facilities The Proposed Home2 Suites is to be a three-story building with interior corridors, as shown in the site plan on the following page. It would adhere to the design standards of Hilton, which emphasize elegant furnishings in a contemporary style. As is typical of this hotel brand, its ground floor would contain a lobby, a multi-purpose (breakfast) room, a fitness center, and a pantry (sundries store) adjacent to the front desk. In keeping with the residential character of the lobby spaces, the hotel would contain outdoor patio and lawn areas that would have barbeque facilities and seating areas. The principal services of the hotel would be a complimentary buffet breakfast and complimentary wireless Internet service. Guest rooms. As planned, the Proposed Home2 Suites would have 142 guest rooms. The planned mix of guest rooms is set forth in the following table. ROOMS MIX Room Tvoe One-bedroom Suite Number Double Queen Studio Suite King Studio Suite total rooms Source: Royal Hospitality Carlsbad, LLC 16 17 109 142 Share 11% 12% 77% 100% All of the guest room suites would have a kitchen with a dining table, cooking utensils, china, silverware, and other cooking and dining amenities. Each suite would also have a desk, a flat-screen television, and customary guest room furniture and fixtures. -16- Parking. The hotel ts to have 177 parking stalls, which would be m surface parlcing lots surrounding the hotel. I I I I I I Wright Place Palomar Airport Road Recreation amenities. Recreation amenities would include an outdoor pool, a fitness center, and a playground. In addition, the patio and lawn areas would be available for certain recreation activities. Management. An affiliate of the developer is to manage the Proposed Home2 Suites. Marketing. The Proposed Home2 Suites would be affiliated with Hilton and therefore would have the benefits of the marketing and name recognition of this prominent hotel chain. Also, the developer intends to implement a variety of effective pre-opening and ongoing marketing programs, including a productive Internet marketing effort, consumer advertising, community and other public relations, direct sales efforts by management personnel, and other appropriate marketing. The hotel is to be listed in a variety of published and Internet hotel directories. The estimates of the performance of the hotel contained herein assume that the aforementioned marketing program will be implemented. -17- ESTIMATED PERFORMANCE OF THE PROPOSED HOME2 SUITES Estimates of the occupancy, average room rate, and other measures of the market performance of the Proposed Home2 Suites are set forth in this section. These estimates will be derived from a market penetration analysis. Market Position The Proposed Home2 Suites would compare to its competitors as follows: Relationship to Demand Generators: The Proposed Home2 Suites would be located near Palomar Airport, where many office and industrial demand generators are situated. Those hotels that would be nearer the coast, such as the Hilton Garden Inn, The Hyatt House, and the proposed SpringHill Suites, would have competitive advantages due to their strong appeal to beach visitors. On the other hand, the hotels in San Marcos and Vista would have inferior locations due largely to its greater distance from Palomar Airport. Neighborhood: The Proposed Home2 Suites would be in the midst of much office and industrial development, and several competitive hotels are located nearby. Facilities: The Proposed Home2 Suites would have the kitchens and other facilities commonly found in extended-stay hotels. These facilities are in great demand by many of the hotel customers in the market area, and particularly by visitors to the local high-tech companies. In general, the local extended-stay hotels outperform other types of competitive hotels. The hotel would also be an upper midscale hotel, which is an under-represented hotel type in this market. Also, the hotel would have new facilities, which would provide it some competitive advantages over most of the existing competitive hotels. Brand Affiliation: The Proposed Home2 Suites would be affiliated with Hilton, which has a potent frequent-guest program and other productive marketing programs. This affiliation should provide the hotel competitive advantages. Pricing: As an upper midscale hotel, the Proposed Home2 Suites would have the market image of a moderately-priced hotel, which should contribute to its market appeal. Estimated Occupancy The estimated market penetration and resulting occupancies of the Proposed Home2 Suites are summarized in the following table. ESTIMATED OCCUPANCY: PROPOSED HOME2 SUITES Year Market OccuQanc~ Penetration Hotel OccuQanc~ 2017 75% 95% 71% 2018 74% 103% 77% 2019 75% 103% 78% 2020 75% 103% 78% 2021 75% 103% 78% 2022 75% 103% 78% Source : Kallenberger Jones & Co. -18- As indicated in this table, the occupancy of the Proposed Hotel is forecast to be 71 percent in 2017, but then increase to 77 percent in 2018 and 78 percent in succeeding years. The penetration rate is estimated to increase from 95 percent in 2017 to 103 percent thereafter. As with most new hotels, the occupancy was forecast to be lower in the first year of its operation due to the start-up problems associated with an uncertain opening date, construction re-work, and the marketing required to establish a market presence. Estimated Average Room Rate An estimate of the average room rate (ADR) of the Proposed Home2 Suites by market segment and by type of guest room yielded an overall ADR of $122 in a representative year (in current dollars in a stabilized year). This estimated ADR is slightly higher than the average of the four competitive upper midscale hotels in 2014 ($117); however, if the aggregate ADR of these four hotels should increase five percent in 2015 (to $123), then the projected ADR of the Proposed Home2 Suites would be $I lower than the average of its upper midscale competitors. The estimated average room rates of the Proposed Home2 Suites in its first six years of operation are presented in the following table. ESTIMATED AVERAGE ROOM RATE: HOME2 SUITES Inflated Discount Adjusted Rounded Year Rate Factor Rate (50 cents) 2015 $122.00 2014 $125.05 2017 $128.18 (4.0%) $123.05 $123.00 2018 $131.38 (1.0%) $128.75 $129.00 2019 $134.67 0.0% $134.67 $134.50 2020 $138.03 0.0% $138.03 $138.00 2021 $141.48 0.0% $141.48 $141.50 2022 $145.02 0.0% $145.02 $145.00 In this analysis, the estimated ADR of $122 in current dollars was adjusted by an assumed inflation rate of 2.5 percent per annum to arrive at the ADR in 2017, when the hotel is expected to open. In addition, the average rate in 2017 was discounted by four percent in 2017 and one percent in 20 18 to reflect the introductory rates that are typical of a new hotel. The final estimates of the ADRs of the hotel were rounded to the nearest fifty cents. -19-