5 Things to Know About Hotel Development in California
By Danielle Hess
IRVINE, California—Construction costs may be high, but that’s not stopping developers from building new hotels in the Golden State.
Atlas Hospitality Group’s 2019 Mid-Year California Hotel Development Survey shows 36 hotels opened in the first six months of the year, and new hotels under construction rose 28% as the number of new rooms under construction increased 25%.
California had 1,143 hotels in planning during the first half of the year compared to 959 for the same period last year.
Here are five main takeaways from the survey from Alan Reay, president of Atlas.
1. Marriott product dominates new supply
In hotels and rooms under construction, brands under Marriott International led the way, with 71 hotels and 11,200 rooms.
Reay said Marriott is the No. 1 choice for developers in California for new hotel product.
The vast majority is that higher-end limited service,” he said. “The exception to that is the huge volume of full-service product that we are seeing in the downtown Los Angeles market, which really is leading all of California in terms of hotel development.”
2. Independent hotels beat Hilton for new product
Independents claimed the second spot for most new hotels and rooms under construction with 55 hotels and 6,932 rooms, beating out Hilton (49 hotels with 6,147 rooms).
Reay said he was a little surprised by how many new projects are independent hotels because it is hard to find financing for those projects, “although lenders are definitely more open to that than they were in the past.”
Several independent hotels in California added casino-hotel projects, which is likely why there were more new hotels and rooms under construction in that space, he said.
“If we were to back out those properties, it would fall down in terms of number of rooms from an independent standpoint,” he said.
3. Supply will overtake demand … at some point
Atlas expects new supply growth to continue into 2020 and 2021, but so far that hasn’t had a negative impact on revenue-per-available-room growth at most California hotels, Reay said.
“Some of the areas have started to flatten a little bit, Anaheim being an example where we thought there would be much more of a kick after the opening of the ‘Star Wars’ park (Galaxy’s Edge at Disneyland),” he said.
The economy is in its 10th year of a strong rebound, but “business isn’t doing very well (and) the tourism into the state isn’t very strong,” which will eventually lead to supply outpacing demand, Reay said.
“The hotel owners that need to be most concerned are those with older product and those that have not really invested back into their hotels,” he said. “They are going to have a hard time competing.”
4. Downtown LA a hot spot for development
There’s a heavy concentration of development in downtown Los Angeles, and Reay said there are a few reasons for that.
“One is the city is being very aggressive on tax incentives, getting back transient occupancy sales tax, and obviously there’s been a big push in downtown LA from the convention center to commercial business to everything else,” he said. “That is a combination of the city working closely with hotel developers to attract full-service hotels that most cities have not been able to attract because of the cost of construction.”
Los Angeles County has 45 hotels with 7,497 rooms under construction, leading the way in the state for rooms under construction. Four new hotels opened in the county with a total of 505 rooms, the largest of which is the 271-room Santa Monica Proper Hotel.
5. Owners want to build new, not renovate
Construction costs in the state have increased 20% to 25% in the past 18 months, “but despite that, we’re still seeing a record amount of new construction,” Reay said.
This speaks volumes to how strong the market in California is, he said, and while the state has its ups and downs, “all of the factors for California are very, very positive.”
Reay added that there’s a lot of new development because “all of the product in California is at or above replacement cost,” so owners are choosing to build a new hotel rather than update a 30-year-old one.
Atlas will release its transactions survey in a few weeks, and Reay said, “You will see how that may be tying in with all of the new development we are seeing.”