LOS ANGELES-With a dearth of available properties and a wealth of investors seeking them, the hotel space is looking up, say industry experts. According to Jones Lang LaSalle Hotels research, global hotel transaction volume during 2011 totaled $31.2 billion, a 17% increase over 2010, and hotel real estate investment in the Americas reached a four-year high last year, with transaction volume swelling to $15.2 billion, a 24% year-over-year rise. However, Atlas Hospitality Group reports that improving hotel fundamentals are causing more hotel owners to hold onto their properties, which is hurting the investment market.
Locally, the West Coast hotel sector is following global trends. “I’d say the state of the West Coast hotel market is very strong, and it’s continuing to improve,” Tony Muscio, SVP of JLL Hotels, tells GlobeSt.com. “You have RevPAR continuing to increase, thanks to occupancy fueled by group, corporate and leisure demand. Also, there’s a lack of new hotel supply, so not as many hotel rooms are being built, which helps this dynamic. And finally, the high barriers to entry on the West Coast make it hard to build in many markets.”
Muscio adds that San Francisco is one of the top West Coast hotel markets, with solid supply and demand and strong fundamentals. “It’s a market that’s generating investor equity from private investors and REITs, plus it attracts both international and domestic visitors—it’s just a solid market.”
Also strong are many submarkets of Los Angeles, including downtown, Hollywood, West L.A., Santa Monica, Santa Barbara, Orange County—particularly near Disneyland, Newport Beach and South Orange County—and San Diego’s downtown and La Jolla. In Hawaii, the top hotel markets—some experiencing doublt-digit RevPAR growth—include Waikiki, Oahu, Waialua, the Big Island and Kauai. “Group business travel and transient demand are fueling this,” says Muscio. “Hawaii has strong international and domestic visitors.”
For the most part, pricing has increased since 2011, but on a property-by-property basis. “If RevPAR is increasing and brought to the bottom line, there’s a higher net operating income,” says Muscio. “Investment yields have narrowed and cap rates are continuing to contract. Also, the availability of debt has improved since last year.”
Going forward, Muscio is unsure whether construction will start up in a major way, and he says investors will be concentrating on the top markets, value-add opportunities and branding management for the rest of the year. “Across the board, to really break down the top hotel properties, you’re looking at location, fee simple or leasehold (fee simple is best), unencumbered brand or management, strong in-place cash flow, and is there value add?”
For Bob Olson, CEO and founder of R.D. Olson Development in Irvine, CA, the lack of supply made a return to hotel development necessary for this investor and developer. After the 2008 economic meltdown, many investors in the hotel sector—including R.D. Olson—were waiting on the sidelines for a rerun of the mid-’90s, with opportunities to buy hotels for 20 to 40 cents on the dollar. This never happened.
“We’re 12 months out of where the bottom hit, and frankly, in the strong markets there never really were any assets that came up at a significant discount,” Olson tells GlobeSt.com. “That triggered us to get back into the development cycle.”
Olson began to develop hotels again in mid-2009 when the firm began to see prices holding steady and has been on a successful building streak ever since. As GlobeSt.com previously reported, in late August the firm opened its fourth hotel since last November, a 108-room Courtyard by Marriott in Goleta, CA., and has several hotel projects in the planning stages include a $38-million, 144-room Residence Inn in Pasadena, CA, on land Olson owns; and a $24-million, 140-room Residence Inn in Goleta.
The most difficult piece in the development puzzle has been going through the entitlement process, which Olson says long and “not for the weary.” The Goleta Courtyard by Marriott project took 11 years to develop, thanks to slow-growth communities and challenges to environmental impact reports. “In all fairness, that’s not the norm, but it can easily get to that.”
Olson tells GlobeSt.com that he believes in the hotel market and that the improving economy is driving the hotel business. “We’re seeing a 5% increase in RevPAR, which is a little lower than what industry experts are telling us, but a 5% increase is good for our industry. The hotel industry is a mirror to the economy.”
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
