Business & Real Estate

With Sacramento room rates rising, why are builders skittish to build more hotels?

Construction crews work on the new Hampton Inn on 65th Street near Highway 50 in Sacramento on Wednesday, Nov. 9, 2016.
Construction crews work on the new Hampton Inn on 65th Street near Highway 50 in Sacramento on Wednesday, Nov. 9, 2016.

After several lean years during the recession, the Sacramento region’s hotel industry is seeing tremendous growth in room prices and occupancy rates, spurred by business travelers and tourists.

But developers’ reluctance to add new rooms may cost the region some economy-boosting events, including perhaps the NBA All-Star game, analysts say. In 2009, the average daily rate in Sacramento was $92.39. For 2016, that figure is $115.43, according to CBRE Hotels Consulting, a research firm. Occupancy rates, meanwhile, have soared from 54.9 percent to 77.1 percent during the same period.

Sacramento’s hotel industry has traditionally catered to public agencies and those conducting business at the Capitol, with about 2,000 rooms in the downtown core. The Hyatt Regency, Sheraton Grand, Holiday Inn and Embassy Suites are among the larger establishments operating in this area.

Outside the central core, the region’s hotel stock consists mainly of so-called limited-service lodgings. These small roadside inns and motels offer no-frills, typically with nothing more than a bed, desk and free continental breakfast in the morning.

Even with downtown Sacramento now dotted with attractions like the arena, farm-to-fork restaurants and clubs, developers are apprehensive about adding more rooms, citing costs and lending problems.

“Hotels aren’t cheap to build, and financing isn’t all that easy to get,” said Catherine Bolstad, a San Francisco-based director for CBRE Hotels Consulting.

Over the last few years, the region’s economy has diversified, adding jobs in fields like health care. Local officials have also pushed to market their cities as weekend destinations for sports teams.

Still, Bolstad said the new clientele isn’t enough to spur a building spree, noting that rates for Sacramento have been historically depressed.

“Sacramento’s problem is that its population is 500,000,” said Tony Dimond, principal at HTL Hospitality Advisors, explaining that it is difficult to convince lenders to bankroll new projects due to the lack of scale.

The lack of hotels has recently hurt the city’s ambitions of hosting the NBA All-Star Game in 2020. The NBA’s 5,000-room requirement is far greater than the 2,000 rooms on offer in downtown. Yolo County Supervisor Oscar Villegas has proposed using cruise ships docked at the Port of West Sacramento to house attendees.

The quest for significant hotel projects has also been hobbled by the changing tastes of consumers who are gravitating toward limited-service establishments that offer lower rates.

West Sacramento leaders in 2013 began envisioning a luxurious waterfront hotel next to the Tower Bridge. Officials went abroad in search of money. At times, a South Korean pension fund and an Australian investment firm were viewed as possible financiers.

“It has been a United Nations trying to build a hotel project,” said West Sacramento Mayor Christopher Cabaladon.

Though there are no active plans, Cabaldon said “interest remains high,” adding that the city is still in periodic discussions with developers and Marriott International.

The city of Roseville went through a similar phase in 2014 when its officials spent $47,019 to fly halfway across the globe to South Africa to secure funding from Issar Investment Holdings. Roseville officials and Issar initially discussed a 50-50 joint partnership to build a $90 million, 10-story four-star hotel next to the Westfield Galleria, but Issar later asked the city to build and operate the hotel for three years before selling it to the firm.

The planned 175,000-square-foot hotel, which had been slated to open in 2016, called for 248 rooms and 22,000 square feet of event space. Roseville officials eventually scrapped their plans after financing fell through.

Sacramento-based Jackson Properties is betting that there is demand for new limited-service hotels in the region. The developer of office parks is constructing the company’s first hotel – a Hampton Inn – off 65th Street near Highway 50 and Sacramento State.

Owner John Jackson said he chose the Hilton franchise after staying at several Hamptons during a road trip across the country.

“There is more demand for these than full-service (hotels),” Jackson said.

He compared limited-service lodging to fast-casual restaurants like Cafe Bernardo, which offers a better price without sacrificing too much quality. The rates at the new Hampton Inn are expected to be about $150 a night, according to Jackson.

Steve Hammond, head of the Sacramento Visitors & Convention Bureau, said he expects new hotels to be built in downtown only after the city’s convention center is expanded.

“To have another Hyatt or Sheraton, we’re going to need a convention center expansion before that’s going to happen,” he said.

Richard Chang: 916-321-1018, @RichardYChang