Market favors smaller properties that need less capital but struggles with “bid-ask spread”

Sep 10, 2024, 11:30 AM | By TRD Staff

It pays to think small in the Los Angeles hotel market.

At least, that’s how the market has worked so far this year.

Los Angeles County saw a 6 percent drop in the overall number of hotel sales in the first half of this year while the total dollar volume plummeted 79 percent, the Los Angeles Business Journal reported, based on a report by Atlas Hospitality Group. 

The data indicate a sharp shift toward smaller properties and price tags compared to the first six months of 2023. The decline from 17 deals in the prior period to 16 this year was accompanied by a dip of nearly $800 million in dollar volume — from a tick over $1 billion a year ago to $212 million over the first half of this year. 

A total of 1,026 rooms changed hands this year, down from 1,313 in the first half of last year, a drop of 22 percent.

The average price on a per-room basis declined from $317,000 to $194,000, down nearly 39 percent.

The market appears to struggle with a confluence of factors that make smaller properties a relative bargain in more ways than the price. Also working in favor of smaller establishments and price tags are higher interest rates adding to borrowing costs and newly passed Measure ULA, which slaps a property-transfer tax of 4 percent on transactions between $5.15 million and $10.3 million, and 5.5 percent on anything higher.

Tony Muscio, a senior managing director at JLL, told the Business Journal that the market has “a bit of a bid-ask spread. When those interest rates come down. we can get back to more of an equilibrium.”

“Some of the owners are looking at what the market was,” said Alan Reay, president of Atlas Hospitality. “There’s a big disconnect.” 

Reay explained that deals for bigger hotels have been held up because many owners have seen their equity in the properties evaporate, often leaving no profit to be gleaned from a sale.

The county’s biggest deal in the first half of the year fell squarely in the middle of the market at $68 million for the 176-room Residence Inn LAX/Manhattan Beach, with the price working out to  $386,000 per room.