California Sees Pricing, Development Boom in 2015

California Sees Pricing, Development Boom in 2015


California Sees Pricing, Development Boom in 2015
By Sean McCracken


REPORT FROM THE U.S.—By just about any metric, California’s hotel industry had a massive 2015.

Recent surveys of both transactions and development from Irvine-based Atlas Hospitality Group show records for sales volume, price per room and new construction.

California hoteliers said the state’s hotel boom offers both opportunities and challenges as the key performance metrics remain strong, but high demand markets grow more competitive for both projects and consumer dollars.

“Some (developers) we’re talking to who were early into the game said they wouldn’t do those deals today,” said Alan Reay, president of Atlas Hospitality Group. “Now they’re only looking for prime, prime markets with high barriers to entry. If I was a developer, I’d be looking at those locations, and I believe there are still opportunities with the right brands.”

New builds
A total of 34 hotels with 4,395 rooms were completed in California during 2015, according to Atlas’ hotel development survey.

The state ended the year with 98 hotels and 15,833 rooms under construction. Reay’s company notes this is a substantial increase over the past couple years. The number of hotels under construction at the end of the year were 253% more than those opened in 2015 and 396% more than 2014.

There are a total of 495 hotels with roughly 74,000 rooms in the state’s pipeline, with roughly half of those in major markets in southern California.

Los Angeles County in particular saw a 4% increase in room count in 2015 and has 19,854 rooms in some stage of planning with 35 hotels and 6,649 rooms under construction.

Reay said it’s too early to fret about oversupply across the state.

“It’s basically making up for the downtime we had between 2009 and 2013 when very little new supply came into the marketplace,” he said.

Dev Patel, chairman and CEO for Kamla Hotels, which has a growing portfolio of hotels in California, agreed that supply growth hasn’t hit the point of concern yet.

“We’re seeing a lot of new development and new products announced, but we don’t expect supply to be significantly more than the long-run average,” he said.

Transaction pace and pricing
Atlas’ 2015 hotel sales survey showed that most areas of California saw a decrease in the number of transactions, but pricing across the state went through the roof, with total sales volume jumping 87% year over year to a record $9.5 billion. Median sales price per room also increased 36%.

Suresh Patel, president and CEO of San Diego-based Excel Hotel Group, said that pricing in California has pushed his company, and likely others, to focus more on development.

“We’ve been developing because the pricing has been so bad,” he said. “It doesn’t make sense to buy existing properties.”

While the number of transactions in Los Angeles County dropped to 58 in 2015 from 66 in 2014, dollar volume rose 41% and price per room increased 94%.

In San Diego County, the number of transactions remained stable at 30 while dollar volume jumped 84% and price per room increased 65%.

San Francisco County saw the highest total dollar volume in the state for the year at almost $2 billion, a 149% increase over 2014. Average room price increased 109% while the number of transactions fell from 27 to 18.

Expectations going forward
Suresh Patel said he’s already seeing the dynamics that pushed his company to focus more on development shifting to possibly favor more reasonably priced transactions.

“Now we’re seeing pricing going down a little bit,” he said. “There are not as many big-ticket buyers, but there is still cash on the market.”

At the same time, he said increasing labor costs and difficulty finding affordable land to develop makes new builds that much more difficult going forward.

Dev Patel said he believes there is some runway left for California hotels, as industry fundamentals look to hold strong for the near future at the very least.

“I would still say that 2016 will be a good year in terms of (revenue per available room) growth,” he said. “And 2017 should also be a decent year. I say as long as we don’t overbuild and we manage our development scale here, I think we should be OK. I don’t anticipate anything as ghastly as 2009 again in our future, but I do feel like we’re almost at our operational peak.”

Key markets
Reay said the markets that continue to hold the most promise for hoteliers are San Francisco and west Los Angeles. But he said portions of northern San Diego County and Anaheim might suffer overall from the amount of development they’ve seen in recent years.

“A lot of the same kinds of hotels are going after the same type of client base,” he said.

He said downtown Los Angeles is also nearing that point, but it seems like it will remain healthy for the time being.

“There’s been a huge building boom in downtown LA,” Reay said. “All reports say it can be absorbed, but it seems like we hear about a new project every week. And these are big, 500- to 700-room hotel projects.”

Dev Patel said the eastern portion of the Bay Area also holds promise.

“With everything happening in the Bay Area, including San Francisco and Santa Clara, we’re seeing a lot more opportunities coming in the East Bay area.”

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