It’s been a record year for tourism in Los Angeles — LAX saw nearly 57 million visitors pass through in the first eight months of 2017, according to airport records — and the hotel market is still growing, experts told The Real Deal.
Yes, there were whispers of oversupply last year, when 11,120 rooms were in the pipeline, according to a TRD analysis in September 2016. Some of that product was delivered before the end of that year, and Los Angeles has opened another 4,700 rooms so far in 2017 with another 5,209 still under construction, according to Joshua Emory, a principal at real estate capital advisory firm Primrose Capital.
All that new inventory continues to make lenders squeamish about issuing traditional construction loans for new projects in the immediate future. But commercial brokers argue that conventional wisdom doesn’t apply in this market. “There is a lot of product coming on line, which could look like oversupply,” said Mike Condon Jr., an executive managing director at Cushman & Wakefield. “But there’s been a paradigm shift, especially in Downtown L.A. Historic numbers and data are now not nearly as relevant as forward-looking data.”
Some reports do support that optimism. Hotel investment in L.A. hit $1 billion in the first half of 2017, a 109 percent increase from $479.4 million in the first half of 2016, according to CBRE’s H1 capital markets report. As of July, average daily rates were up 2.4 percent over the same time last year, to $190.42. RevPAR (revenue per available room) in Los Angeles County was relatively flat, decreasing just 0.5 percent to $163.44 in July from the same time last year. Occupancy dropped slightly, by 1.4 percent, but that could be attributed to the increased inventory.
Both Downtown L.A. and Hollywood are seeing rapid changes in terms of street-level attractions and density, which is cultivating interest from the hotel market. Though Hollywood, like much of the city’s Westside, is challenging for developers seeking entitlements, its access to entertainment and transit makes it very attractive to the hospitality sector. Downtown L.A. is similarly well positioned, and it offers a more streamlined entitlement process.
The two increasingly pedestrian-friendly neighborhoods have drawn business travelers away from the Westside and Santa Monica, where many traditionally stayed, sources said. Now, business travelers are looking to utilize amenities in a freshly made-over Downtown. And they won’t be staying in the drab, utilitarian sorts of suites they’d encounter elsewhere. “There’s a move away from the ‘cookie cutter’ brand hotel,” said Joshua Emory of Primrose Capital.
Architecture, planning and design firm Steinberg, which has multiple hotels in the pipeline, is looking to break some of the molds. The firm is working on three hospitality properties in the burgeoning “hotel district” along the corridor at Cahuenga Boulevard and Selma Avenue in the heart of Hollywood: the 200-key Thompson Hotel, which is under construction, the 200-key Tommie Hotel, which breaks ground soon, and the 179-key Godfrey Hotel, also under construction.
Chicago-based real estate investment, development and management firm Oxford Capital hired Steinberg to design the Godfrey, which will feature 230-square-foot rooms that are geared toward business travelers.
The Tommie Hotel — “designed with a WeWork-style ground floor, maybe a coffee bar,” according to Steinberg architect Simon Ha —will cater to young professionals. Its rooms will be only about 200 square feet. The Thompson Hotel will target a higher per-night rate with luxury amenities and larger rooms.
The positioning along that Cahuenga Corridor in Hollywood primes hotels to take advantage of proximity to major entertainment industry companies also moving into the neighborhood. Netflix moved its offices from Beverly Hills to Hollywood this year. It joins BuzzFeed, Viacom and Emerson College — with its futuristic Sunset Boulevard campus — in establishing a presence in the heart of Hollywood.
Meanwhile, over in Downtown L.A., where hoteliers have been drawn to the inventory of historic buildings, the spotlight’s on luxury boutique hotels. Adaptive reuse has been the “sexy” route for those hotel developers, but Condon is starting to see the remodeling trend lose steam.
“We are doing a little less of those now, because of the price. Those buildings have a lot of expensive challenges,” he said.
Also, most of the historic buildings are already spoken for, and there’s a finite number of them in the area.
“We’re at a point where the values of those buildings just don’t pencil for financing,” Condon said. Going forward, he said, expect to see more ground-up development in the area, which offers more bang for the buck. And those builds will be on the smaller side. “You’re not going to see 70-story towers. The sweet spot on boutique hotels is 150 keys. The high end is 250 keys,” Condon added.
Major projects coming on line Downtown include Oceanwide Plaza, by Beijing developer Oceanwide Holdings Company, which will include the 53-story, 184-key Park Hyatt Los Angeles and Residences designed by Studio Munge. Scheduled to open in 2019, the project also features a 66,000-square-foot open-air retail galleria, landscaped gardens, a pool with outdoor cabanas, and a 2-acre park 100 feet above street level with gardens, a jogging track, basketball court, pools and spa, and two dog parks.
Steinberg is remodeling Relevant Group’s Morrison Hotel, famous as the namesake location of the Doors’ album cover. The luxury boutique hotel will retain its look, with historic features to be restored.
Hollywood presents more challenges when it comes to new projects. After all, it’s the birthplace of the anti-development Measure S, which failed in the March 7 election. It makes for a contentious environment for proposing a new project.
“Everything is contested … It creates a smaller pool of developers who are willing to go in and take the risk. Seasoned developers understand the risk, so they price it in and schedule for it,” Ha said.
When it comes to construction financing, going forward expect to see an increase in higher-rate debt funds — an alternative source of funding — rather than bank financing, according to Emory of Primrose Capital.
“Most banks are tapped out in terms of new hotel loan allocation,” he said. “Or they’re just cautious and want to wait and see absorption.”
But there should soon be plenty of evidence to bolster confidence in the L.A. hotel market, if commercial brokers are to be believed.
“There are a lot of under-the-radar deals that are percolating,” said Condon. “I fully expect there to be more gas thrown on the fire and to hit another wave of strong acquisition appetite in the near term.”
This article has been amended to update the construction status of the Godfrey Hotel.