Hotel occupancy rates are officially in the 80% range in San Diego, up 1.4% over last year, according to research from RAR Hospitality. This year, RevPAR was up 4.1%, driven mostly by hotel rate gains. With occupancy already running high, next year, RevPAR gains—expected to increase 2.5%—will likely all come from rate gains with no growth in occupancy. Still RevPAR is expect to grow through 2019 in San Diego.

“It is really hard to get occupancy over 80%,” Bob Rauch, CEO and founder of RAR Hospitality, tells GlobeSt.com. “Once you hit that high 70% and 80% range, you have to have an occupancy that performs well every single month. San Diego still have a very powerful summer season, but it is not perceived as the place to go for the winter. San Diego is also a 55% leisure market. Once we hit that high 70% and 80% range, it is going to be all rate after that to drive RevPAR growth.”

The San Diego hotel market is dynamic, with several demand segments. The market has a strong group market that has grown from 800,000 rooms to more than 1 million rooms per year—which Rauch says is at full occupancy for the market. “The group market is still extremely robust, and with an expanded convention center in the long term, that sector can grow,” he says. “At the moment, it is maxed out.” San Diego also has a strong and growing leisure market, thanks in large part to activity from amateur sports teams. “We have a lot of fields and incredible year-round weather,” adds Rauch. San Diego also recently secured a daily direct flight from Japan, which has helped to grow the leisure market, and Rauch is hoping for a direct daily flight from Beijing, which would have a significant impact on the market.

Business travel, on the other hand, is less active in the market; however, San Diego's defense industry offsets business travel with strong government travel. “As far as the corporate, we have a lack of Fortune 500 companies, which has always been the case in San Diego; however, what substitutes for that is a very powerful defense industry,” says Rauch. “We are probably one of the top three in military and government room nights.”

The dynamic demand segments and the strong occupancy and rate growth has also made San Diego a popular investment market this year. As a result, there is limited hotel development, with the exception of Downtown San Diego, which has several hotel properties on the market. “Most of the REITs and public and private companies view San Diego as a good investment because the barriers to entry are significant,” adds Rauch. “I think San Diego has multiple demand generators. Not all markets the group and leisure markets that San Diego has, and that makes it desirable as an investment.”