Hotels are going up at a blistering pace
Builders see opportunities, particularly in Southland
Coming off a record-setting 2017, hotel development throughout California this year shows no signs of slowing, even as construction costs continue to climb.
A reported 182 hotels accounting for nearly 25,000 rooms were under construction up and down the state in the first half of the year — a more than 40% increase over same period in 2017, Atlas Hospitality Group said in its semiannual survey of hotel development.
Expect more of the same, especially in Southern California destinations such as in downtown Los Angeles and San Diego, as well as Anaheim, where developers have been especially bullish. Of the 2,400 hotel rooms being built in Orange County, the vast majority — nearly 1,800 — are in Anaheim.
Orange and Los Angeles counties saw robust growth spurts in construction, rising 100% and 25%, respectively, during the first half of 2018 compared with the same period in 2017.
In San Diego County, hotel rooms under construction during the first half of this year jumped 63% com-
pared with a year earlier. The individual properties span the region, from the Pala and Sycuan casinos to the downtown San Diego InterContinental, a 400room property expected to open next month.
Fueling the enthusiasm for ongoing development has been an unstoppable run-up in hotel occupancy and revenue levels over the last eight years that is outpacing the nation as a whole.
Current occupancy rates in the Los Angeles and San Diego markets remain in the high 70% neighborhood and are forecast to stay at that level, well ahead of the national rate of 66%, according to CBRE Hotels.
“We continue to do market studies for new hotels and once in awhile we come up with a negative, but we’re finding the market can still absorb new supply,” said Bruce Baltin, managing director for CBRE’s Los Angeles office. “The industry as a whole has been watching its growth over the last several years because there is concern about the potential for overbuilding, but so far the industry is absorbing the supply very well with still good occupancy.”
Although statewide the number of hotel rooms that have opened this year is down from the first half of 2017, ongoing construction paints a much more dramatic picture of what lies ahead.
In Los Angeles County, for example, there are 37 hotels with 5,631 rooms under construction, compared with just four hotels that have opened this year. Similarly, in San Diego County, 20 hotels with more than 3,000 rooms are in various stages of construction, while just four hotels have opened this year, the largest being Legoland’s Castle Hotel, Atlas reports.
“Construction costs are increasing 20% to 25%, which has caused some people to pause,” acknowledged Alan Reay, president of Atlas Hospitality. “But people are looking at projects in San Diego, downtown L.A., the Bay Area on a long-term basis.
“And financing is still available and at low interest rates. Even before the last downturn, San Diego, Los Angeles and Orange counties have been below the national average in terms of level of supply because it’s so hard to get permits in California and the entitlement process is so long.”
Reay noted that in downtown Los Angeles, the impetus driving many of the larger projects is a desire to draw more leisure travelers as well as business for its convention center. Some developers, he said, are taking advantage of lucrative public subsidies, as in the case of a 1,153-room hotel complex across from the Convention Center approved in May by the Los Angeles City Council.
San Diego hotel developer Robert Green, who has multiple hotel projects in California either under construction or in the planning stages, says he understands the risk of overbuilding but is strategically choosing desirable locations that he believes will be profitable over the long-term.
His company opened the Pendry in San Diego’s Gaslamp Quarter last year and is preparing to submit an application this fall to develop another hotel across the street, he said. Green also has projects in La Quinta, Sonoma County, Silicon Valley and Del Mar.
“That’s why my hair is gray,” Green joked. “This is our business, we will see cycles, but we finished two hotels in 2017 and we’ll finish two in 2020. There is the possibility we’ll get something entitled and if the cycle turns downward, we wait for a few years.
“You never know, you can’t predict where you’ll be a year or two from now. So we’ll have to adjust accordingly.”