Hannah Welk | September 9, 2024

Hotel construction has been inching downward in Los Angeles from 49 projects with 7,650 rooms as of midyear 2020 to 19 projects with 2,121 rooms this year, according to data from Atlas Hospitality Group.

“We’re seeing a lot of projects that were under construction going into foreclosure or bankruptcy,” said Alan Reay, president of Atlas Hospitality. He added that hotels are “trading below replacement costs” which was further making things difficult.

Another issue, he said, is the difficulties in securing financing for hotel projects. There are currently more than 29,000 hotel rooms in planning, compared with more than 42,000 this time in 2020. Reay said only a small percent of those rooms will actually be built.

“I really don’t see a lot of new projects that are still in planning getting built. The product type that is getting built is mid-size hotels like Residence Inn by Marriott, Hampton Inn and Suites, 100 to 200 rooms, very little as far as full-service hotels,” Reay said.

Still, some experts say development is on an upward trend.

“We are starting to see some activity…but it’s not as active as it was pre-pandemic,” said Sonnet Hui, general manager and vice president of real estate consultancy firm Project Management Advisors.

Areas still in demand

Reay said despite the difficulties in the market, especially challenging areas like Malibu and Santa Monica are still desirable for developers.

“When we look at the market, one of the things that impacts value more than anything is if you have a huge spike in supply,” Reay said. “You just don’t get that in those areas.”

Investors, he said, “look at those assets much more long term. Those are markets that are very, very desirable.”

And there have been some hotels to open this year. The biggest hotel to open during the first half of the year is the Cambria Hotel Burbank Airport with 150 rooms.

Indy Adenaw, the senior vice president and general manager of Upscale Brands for Choice Hotels International, which includes Cambria, said the hotel fit the Burbank market.

“It is a brand that gives you a sense of upscale offerings but is also very relaxed and approachable and fits Burbank very well,” Adenaw said.

While the property has been in the works for years, Adenaw said the company’s “faith in Burbank…never wavered.”

Still, Adenaw said factors like interest rates and increasing construction costs “have significant influences in how we think about hotels” going forward.

Olympics, sporting events coming

Hui said with the Paris Olympics over, she expects “more focus on L.A. being ready for the ’28 Olympics.”

“We’re seeing more of the hospitality adjacent services, more restaurant activity, more space activities, more entertainment activities,” Hui said.

She said she is also seeing major brands doing upgrades.

Alex Kuby, associate principal at Long Beach-based DyeLot Interiors, said he is starting to see more interest which “is driven by the strong returns to pre-pandemic numbers as far as occupancy.”

“There’s a lot of renewed interest even though lending rates have been pretty challenging,” he said.

He added that international travel is lagging behind other segments of the market and is expecting to see that change with the Olympics.

Reay said developers like areas with permanent demand drivers like SoFi Stadium in Inglewood which he said “has created tremendous pressure on rates.”

“If you have a permanent event center like SoFi Stadium, that is the difference,” he said, adding that most developers are not just interested in building for one event.

The planned convention center expansion is also driving some growth, experts agree.

“Downtown Los Angeles has a really great spread of hospitality offerings which is a reality of a city that is in the middle of the resurgence and a new future,” Kuby said, adding that the expansion “justifies investment.”

Hui also said if interest rates go down as expected later this month, it could have a positive impact on development.

“In September we are going to see interest rates go down and that always helps developers,” she said.

Looking forward, Reay sees some positives in the marketplace. California, he said, is “the only state in the union that’s losing supply of hotel rooms” as some are converted into alternative uses. This, he said, will “have upward movement in overall value” of hotels in the long term, making them more valuable.

“All signs for long term are that California will be a great investment,” Reay said.

“There’s going to be a lot of discussion in the next quarter on how to get projects started. Last year what we saw there were studies and money put into design and a lot of developers were not willing to pull the trigger on construction. Construction loans were difficult to get approved. There’s going to be a lot of discussions on restarting projects and next year, especially since this year is also an election year, once the elections are out of the way and interest rates start coming down and people can refocus their energy on getting L.A. ready for the Olympics, it will be very, very busy,” Hui added.