Hotels under construction are distressed, while planned projects get nixed
A report on California hotel construction found there soon will be no hotel construction.
“We are forecasting that the vast majority of hotel projects in planning will simply not get built,” concludes Atlas Hospitality Group in their survey of California hotel construction through the first six months of 2020.
At least developers with projects in planning can still back out, said Justin Myers, vice president of Atlas Hospitality, which is an Irvine-based hospitality brokerage. Other hotels in construction are distressed, while even those completed don’t want to open due to dismal occupancy rates amid the coronavirus pandemic.
Myers gave the example of a 600-room J.W. Marriott in Anaheim by Disneyland. Construction was completed in March, but the hotel did not open until this week.
Overall, 194 hotels were under construction in California through June 30, a 17 percent decline from the 231 hotels built at the same time in 2019. L.A. County has 49 hotels under construction, according to the report.
The number of hotels built could decline further by this time next year.
Atlas Hospitality estimates there are 1,246 hotels in planning throughout California, which means construction hasn’t started but a city government issued project permits or some kind of approval. But those projects will almost certainly be shelved, Myers said, as rising building costs plus low occupancy rates make a construction loan impossible to justify.
Further, while projects under construction are pushing forward, they might be financially unsound. “We have also seen a number of hotels under construction default on their construction loans and enter into foreclosure/bankruptcy,” the report stated.
Myers estimated that the number of distressed hotel projects throughout the state is “over 80” — or almost 40 percent of projects in the pipeline. Examples include Los Angeles developer Urban Commons defaulting on a Bank of America loan to build a 200-room hotel in Koreatown.
The problems facing L.A. hotel construction come after a years-long rise in hotel projects buoyed by city tax incentives to build more lodging downtown. L.A. County far has more projects than other populous California counties — its 49 projects in the works compare with 11 for San Diego County and 4 for San Francisco County.