by Gary H. London
The region’s economy is still losing private-sector jobs. San Diego County lost 2,200 jobs in August and the unemployment rate is now 10.6 percent.
So why is the San Diego City Council making it MORE difficult for investment capital to flow into the region to create potential jobs?
On Tuesday, Sept. 14, the City Council passed a measure amending current downtown development rules. On the surface, the measure is a simple effort on the part of the council to elevate project approval of hotels of 100 or more rooms from the Centre City Development Corp. board to the council. Currently, the council members review only larger hotel projects and leave the small ones to the CCDC board, their appointed representatives. The City Council is simply exercising its right to have final say on all new hotel projects proposed for downtown San Diego.
But this surface is very thin. The elephant in the room is that this marks a new era of forcing union-backed project labor agreements, or PLAs, on all new hotel projects.
The business community obviously views this as unacceptable, for several reasons.
The measure will likely raise the cost of labor because these agreements generally result in union-negotiated deals. Labor cost increases result in higher operating expenses. These higher expenses are not likely to be offset by higher room rates.
The business community is also concerned that this is the tip of the iceberg: that PLAs will become the established policymaking practice at City Hall on all projects.
There is the very real danger that many, if not most, future projects won’t be built. This is a legitimate concern because the San Diego hotel market is not a candidate to support higher hotel room rates.
In fact, during the summer, there was great drama before and during San Diego’s largest convention, Comic-Con. Once their contract expires, Comic-Con organizers may move this very large and prestigious convention to competing cities such as Anaheim or Los Angeles. They have yet to decide. Now, the City Council has put into jeopardy the city’s ability to retain this convention.
Why? Because this new ordinance will strike at the heart of Comic-Con’s concerns with our city: The convention center is not large enough; and we don’t have enough moderately priced hotel rooms near the convention center.
My firm did an analysis on behalf of the Downtown San Diego Partnership to evaluate the prospective impact of this ordinance on the hotel industry downtown. Our conclusions were dire: If this is implemented, as many as 3,100 hotels rooms won’t be added, and the financial loss to the city is ominous. It is the moderately priced hotels that operate at the tightest operating margins that our analysis concludes cannot support higher labor costs.
Hotel projects are not feasible unless they achieve a 15 percent internal rate of return, or IRR. Under all tests, with the only variable being labor costs — from the highest unionized rates to only 25 percent of employees at unionized rates — the projects were not feasible, meaning that they would not be built.
Only if hotels are operated at nonunion wages can they be feasible, unless hotel room rates are raised. The problem here is one of competition with other cities. It is our opinion that hoteliers cannot raise room rates in all but the most prestigious, mostly waterfront hotels, because then we would jeopardize our competitive edge compared with cities such as San Francisco, Chicago and New York, which compete for these same meetings. In effect, vacancy rates would rise, offsetting the revenues associated with higher room rates.
If we are correct in our analysis — or even just a little correct — conventions will not come. They have already told us that their problem with the area is that they need more moderately priced rooms. The moderate price hotel room problem is dependent on the city of San Diego not adding costs to the operations of the hotels. It is as simple as that.
But let me take a step back from our analysis and summarize — fairly, I hope — what the labor organizers who spoke at the City Council hearing testified to. Their case is that these hotel jobs are among the lowest paying jobs in the city, that the people who work in these jobs are at the edge of the poverty line and cannot make ends meet.
I have no doubt that much of this is true. In fact, Sandag’s prosperity strategy documents this labor disparity. I also have great compassion for these people. There is clearly a “disconnect” between what it costs to live and survive in San Diego and the wages that can be paid in the hotel sector.
In fact, if it were not for our proximity to Tijuana, where many of these workers live and commute daily across the international border because the jobs pay more in the U.S. than in Mexico, our hotel industry might not even exist as it is currently scripted.
I believe that union leaders are being disingenuous when they parade hotel workers in front of the City Council to express their concern. If this ordinance is put into law, THEIR jobs are not impacted. It would be 1,600 future jobs for people to maintain the hotels.
So, my observation is this: What doesn’t the City Council — with the exception of Carl DeMaio and Kevin Faulconer, the two council members who voted no on amending the hotel approval process — understand? The arithmetic is simple and it negatively impacts both business and labor.
There are subtexts to this discussion.
This measure represents the gradual erosion of the importance of CCDC as a redevelopment force. To some extent I see this as the inevitable result of the recent leadership scandal; as well as the price CCDC is now paying for being successful in its efforts to redevelop downtown, the assumption being that the nonprofit is not needed anymore to finish the job.
It is also interesting that the measure’s two most vocal proponents will never face a vote on a new hotel. Councilwoman Donna Frye is termed out, and council President Ben Hueso is not running for re-election, instead seeking a California State Assembly post.
Neither will ever have to face the consequences of their poor decision making.
There are a lot of “fronts” to this issue. No doubt both business and labor interests will be bringing this battle in different forms to the City Council, the taxpayers and voters in the coming months and years. One can only hope that the San Diego economy is strong enough to withstand this onslaught of poor public policy, and that our policymakers can possess more evenhandedness and wisdom in their approach to future economic issues.