22 Hotels Opened in State During First Half of Year

By Bryan Wroten | Hotel News Now | July 29, 2024 | 5:49 AM

Twenty-two hotels opened in California during the first half of the year, according to a midyear survey, highlighting the ongoing challenges hotel developers face across the U.S. and in California in particular.

Atlas Hospitality Group’s California Hotel Development Survey Mid-Year 2024 reports that the 22 openings were an increase over the 20 that opened in the first half of 2023, but the 2,289 rooms that opened were a 15% year-over-year decrease. While the number of hotels in construction remained at 122, the number of rooms in construction dropped from 16,321 to 15,468.

What stood out to Alan Reay, president of California-based Atlas Hospitality, is significant increase in the amount of projects in the planning phase that have been abandoned or deferred, though be believes that’s understandable considering what’s going on with financing and other factors.

On top of that, the number of projects that have broken ground and are under construction that have completely stopped is also up higher than previously seen, he said. There are about four or five hotel projects in the Coachella Valley that have stopped construction. There are another three or four in Los Angeles, and there’s also some in Northern California. Some projects are under foreclosure.

The Hotel Indigo project in Coachella is a well-known hotel project that was foreclosed on and sits vacant because the lender isn’t doing anything with it, Reay said. In contrast to that, Hall Financial foreclosed on a hotel project in Palm Springs and continued with its construction. It’s scheduled to open later this year.

“In that particular case, the lender did look at selling the property, but they looked at where the offers were coming in at and said, ‘Hey, we’re going to go ahead and finish this ourselves,’” he said.

Hall Financial is a private lender and is in a different position that allows it to take such action, Reay said. Other financial institutions are not necessarily equipped to go in and finish foreclosed projects, so they end up selling them. However, there’s not much transaction activity on unfinished projects.

“That comes down to the seller’s expectation — the lender — where they’re at with pricing, and where buyers would underwrite these deals is a different number,” he said.

Reay said he doesn’t expect to see much change in the second half of the year. There will likely be close to the same number of projects under construction as many of them have stopped.

Developers trying to get financing on favorable terms is holding up a lot of projects, he said.

“It’s really difficult for both developers as well as lenders to figure out what is the value of this asset upon completion,” he said.

The other factors are the cost of construction, materials, insurance and cost of financing, he said. They all add up to making new hotel development difficult to the point of not making financial sense.

That interest rates are higher now than in previous years creates a two-fold problem, Reay said. One is construction financing, which is relatively short-term spanning from 18 to 24 months depending on the size of the project. Then owners have to look where the hotel will be in two years’ time and figure out what they’ll be paying on the takeout financing — or even whether they’ll be able to get takeout financing.

The higher rates play into this because developers have to calculate how long the project will take them and what they will realistically see on the takeout, he said.

“We’ve had a number of lenders that are just simply not doing loans today, and that’s why you’re seeing a big spike in private money loans,” he said. “These are very expensive.”

All of that pent-up capital looking for transactions won’t cross the line into development, Reay said.

“They’re looking at purchasing well below replacement cost, so there’s no incentive for them,” he said. “There’s no selling to their investors that, ‘Hey, we’re going to buy land and build.’”

Some may be interested in buying a project that is mostly complete, but the price would have to be a big discount, he said. Otherwise, all that money raised for deals is going to sit and wait for a hotel to go back to the bank and get a reset on pricing.