WESTERN SNAPSHOT, APRIL 2006

Palm Springs, California Hospitality Market

Kassinger

Adding to its appeal, Palm Springs has the only downtown submarket in the entire Coachella Valley. Located in the valley’s western region, Palm Springs has a permanent population of 285,000 residents. In the winter season, however, its population spikes to approximately 385,000, due to the large number of second homes in the area. Just a 2-hour drive from Los Angeles, Orange and San Diego counties, Southern California residents flock to their desert homes in the winter to enjoy the city’s unusually warm climate. Not to mention, homeowners are getting double the house in Palm Springs for half the price they are paying for homes in neighboring coastal counties. Because of the low cost of housing in Palm Springs, many Southern California residents seeking permanent housing are also moving into the area like they have been pouring into the Phoenix market for the past few years.

Recent population inflow has increased the demand for hotels in Palm Springs, prompting the development of a trendy hotel downtown. The Palm Springs City Council granted Santa Ana, California-based Nexus Development Corporation the exclusive rights to develop a Hard Rock Hotel on six acres of land adjacent to the convention center. The four-star boutique hotel will have upwards of 200 rooms that offer a hip, contemporary atmosphere. Construction on the hotel will begin in May 2006.

Palm Springs attracts all age groups, from young singles and families to retirees, and is also a growing alternative lifestyle community. Because of the large alternative lifestyle population, many households boast dual incomes. As a result, commercial properties in Palm Springs exchange for the highest price per square foot in all of Coachella Valley, although currently there is little turnover of commercial properties. The few that are trading hands are going for $350 per square foot, with cap rates in the low 5-percent range.

Despite the lack of sales transactions, a handful of redevelopment projects will start to take shape in 2006. Desert Fashion Plaza in downtown Palm Springs will undergo a major renovation towards the end of this year. The site is currently occupied by a 192-room Hyatt Hotel and a partially dark plaza. John Wessman, owner of Palm Springs-based Wessman Development, will take the lead on completely renovating the plaza, with the exception of the Hyatt Hotel, which has the highest occupancy rate in all of Coachella Valley. Plans for the new plaza include a tree-lined promenade and a mix of shops and condominiums. An east-west corridor that ties the town together from the Palm Springs Art Museum to the Convention Center is also part of the master plan. Upon completion, Desert Fashion Plaza will consist of more than 700 residential units and 250,000 square feet of retail space.

Another renovation will commence this month at the south end of town on Highway 111. The Resort at Palm Springs, a 200-room, 1960s-style hotel and restaurant, will be transformed into a trendy Jupiter Hotel. The new hotel will have a rock ‘n’ roll-theme and will also be a concert venue. The Jupiter will offer contemporary lodging at budget prices, with rooms starting at around $69 for after midnight check-in and going for upwards of $150 for special spa packages, falling in line with average room rates throughout Palm Springs.

Room rates in Palm Springs were averaging $114 as of fourth quarter 2005, a 13 percent increase over the previous year. Currently, rates for higher-end hotels are ranging between $130 and $250. Vacancy rates during fourth quarter 2005 were at 49 percent, a close match to the overall 2005 vacancy rate of 50 percent, according to Sperry Van Ness’ research department.

Moving further into 2006, high-priced homes along Southern California’s coastal regions will continue pushing residents inland into the Palm Springs market. Population growth will increase demand in the hospitality sector, increasing room rates and reducing vacancies. Additionally, the high price of commercial land will result in virtually no new hotel development through the remainder of the year. In the near future, Palm Springs could even experience a decline in the number of existing hotel rooms. Hotel developers being priced out of commercial land for development will be forced to seek out alternative projects, and under-performing hotels may be their new targets. These hotels present a golden opportunity for hotel developers to convert them into profitable timeshares or condominiums.

Michael Kassinger is a senior vice president for Sperry Van Ness in Palm Desert, California.

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