Los Angeles Business Journal
03/03/17

Hoteliers May Be Running Out of Room for Deals
By Caroline Anderson

http://labusinessjournal.com/news/2017/mar/03/hoteliers-may-be-running-out-room-deals

With occupancy and hotel rates both hitting record highs in recent years in Los Angeles County, hotelier Renu Sikand had no reservations about checking in to the market.

She and her husband, Happy, paid $16.5 million for a 55-room Best Western Royal Palace Inn & Suites on Sepulveda Boulevard in West Los Angeles through their firm Happy Hotels in January of last year.

“We felt we were paying a little more than we should have maybe, but we’ve been hungry to have something in the L.A. area, so we don’t look back,” Renu Sikand said.

Despite the hotel industry boom, investments such as the Sikands’ have started to cool off, according to a report released last month by hotel brokerage Atlas Hospitality Group.

After hitting a peak of 66 transactions in 2014, sales of hotel properties remained flat at 58 for each of the past two years, the report says. That amount is expected to decline slightly this year.

“There’s no question the market has definitely slowed down,” said Alan Reay, president of Irvine-based Atlas Hospitality, which brokered the deal for Happy Hotels. “I think it’s getting back to a normal market in terms of transactions because the supply is increasing and interest rates are going up.”

Despite the flood of hotel rooms coming on line downtown, the market still remains strong in terms of room rates and occupancy, said Jeff Lugosi, managing director at CBRE Hotels, the hospitality division of the commercial real estate services firm.

“We just have to be careful not to overbuild,” he said.

County hotels saw a record room occupancy high of almost 82 percent last year, according to the Los Angeles Tourism and Convention Board. It had 47.3 million visitors in 2016, a record for the sixth consecutive year. The average daily room rate for hotels in the area increased last year to 8.6 percent from 2015 to a new high of nearly $172.

One of the areas in which demand is strongest is on the Westside, where Silicon Beach is flourishing, said Reay.

That could be a boon for the Sikands’ newly purchased hotel there, which the family said is already reaping rewards.

Renu Sikand, whose son Kunal operates the business, has made $1 million in improvements to the property and increased room rates $37 a night to about $180 at the end of last month. Although the occupancy rate dipped from 96 percent at the time they bought it to 92 percent, she said, their revenue has increased to $2.9 million last year from $2.65 million in 2015. They are projecting to do $3.1 million in business this year.

“This property is going to be a keeper,” said Sikand.

Ground floor

The recession hit the hospitality market hard. Just four hotels were sold in the county in 2009, down from 39 the previous year, according to Atlas. The largest buy that year was Brentwood’s 208-room Hotel Angeleno, which fetched $35 million.

That year, the hotel occupancy rate across the county fell to less than 64 percent from almost 71 percent in 2008. The average daily room rate for the county fell to $115 from about $129 in that period.

Sales made a big comeback in 2010 with 27, and then almost doubled the following year. In 2014, the market saw an all-time high of 66 transactions.

Investors were eager to take advantage of low prices to get a better return on their investments, said CBRE Hotels’ Lugosi.

“Coming out of the last recession, there weren’t a lot of places to open, which meant less competition,” he said. “Places got run down.”

That was the case with a Country Inn & Suites in Calabasas, which had fallen into bankruptcy. Malibu-based real estate investment group Channel West Group bought it from a Goldman Sachs Group Inc. subsidiary for $10 million in 2012, according to Managing Partner Steve McKenzie.
“We thought it was a great location and needed to be repositioned and renovated with a new concept,” said McKenzie. “It needed a lot of work.”

Channel West gutted the guest rooms and replaced the heating and air-conditioning system, reopening the property as the boutique Anza Hotel. The company sold the hotel at a price in the low $30 millions to a private family office in Honolulu in January of last year, said McKenzie.

Yet the number of transactions in 2016 was unchanged from the previous year, and still below the 2014 peak.

“We’ve seen over the past six years an incredible appreciation in values and revenues,” said Atlas’ Reay. “But buyers have started to say, How long is this going to last?”

Atlas projects a drop of 5 percent to 10 percent in the number of transactions in Los Angeles this year. As interest rates rise, lenders will raise the bar for underwriting, its report says.

There were three transactions in the county as of the end of February, compared with four during the same period last year, Reay said.