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Southern California is HOT for Hotel Development as Values Exceed Cost

by Leah Dauer Murphy
January 2013

Southern California is undersupplied with modern lodging products. Numerous projects currently underway indicate that the economic environment in Southern California is ready for new hotel development. Hotel transactions in 2012 attained high prices per-room, demonstrating the continued strong demand for Southern California hotels by investors and the feasibility of building new hotels, as values of existing product start to exceed development costs.

Southern California is one of the most desirable markets for hotel investors, given the area’s diverse amount of corporate demand generators, numerous leisure and recreational attractions, extensive networks of transportation routes, ample airlift from several international airports, three major convention centers, and pleasant year-round weather. Spanning over 56,000 square miles and covering 10 different counties (Los Angeles, San Diego, Orange, Riverside, San Bernardino, Kern, Ventura, Santa Barbara, San Luis Obispo, and Imperial), Southern California is home to more than 22 million residents, or approximately 7% of the total United States population. Given the expansive land area and large population base, Southern California is home to a wide variety of hotel products. The chart below breaks down the total number of guestrooms available in Southern California.

Figure 1 – Southern California – Hotel Supply

With over 3,300 hotels and roughly 292,000 guestrooms, the Southern California guestroom supply represents 6% of the total number of guestrooms available in the United States. This percentage is below the region’s share of the United States population and reflects that Southern California is underserved in terms of guestrooms, especially given the region’s large number of attractions that draw millions of visitors annually from all over the world.

One particular market that is underserved by guestrooms is the area immediately surrounding the Los Angeles Convention Center (LACC) in downtown Los Angeles. As an example, the LACC’s major convention center competitors in Anaheim, San Diego, and San Francisco offer between 15 and 25 hotels (or approximately 7,800 to 19,000 hotel rooms) within a one-half-mile radius of their respective convention centers. While the LACC offers only 11 hotels with roundly 5,900 hotel rooms within a two-mile radius of the convention center, and only five hotels with approximately 1,600 guestrooms within a one-half mile radius of the convention center. Although the addition of the dual-product Residence Inn by Marriott and the Courtyard by Marriott hotels, which are scheduled to open in 2014 with a combined total of 393 guestrooms, will help the LACC’s shortage of guestrooms, opportunities exist in this market for additional hotel development.

Besides the overall shortage of guestrooms in Southern California, several major projects are underway throughout Southern California that show the economic environment is right to begin the next wave of hotel construction in the area. Here are a few examples of the most-notable developments in Southern California:

  • Los Angeles
    • Downtown Los Angeles’ Renaissance - The strong success of LA Live, which contains the JW Marriott and Ritz-Carlton Hotels within, has continued to spur Downtown’s evolution and expansion. Several projects are underway in Downtown, including the following:
      • A major project, known as the Grand Avenue Development, is scheduled for Bunker Hill, adjacent to the Disney Concert Hall. The development has been designed to mirror the Time Warner Center in New York and includes a proposed luxury hotel, condominiums, more than 280,000 square feet of retail space, and a 16-acre park connecting City Hall to the Disney Music Center. The development has been proposed for some time, however, the scale of the project has been reduced due to the recent economic recession. A 19-story apartment tower, adjacent to the Broad Museum, broke ground in January 2013 and is anticipated to be completed by the end of 2014.
      • The Wilshire Grand Hotel was closed in December 2011 for redevelopment. The demolition of the existing hotel improvements began in October 2012, and are planned to be replaced with a 70-story tower to include 900 hotel rooms, 400,000 square feet of office space, and several new restaurants. Upon completion, the 70-story tower will be the second-tallest building in Los Angeles.
      • A proposed 72,000-seat NFL stadium, now referred to as Farmer’s Field, is scheduled to break ground in March 2013 on the site of the existing West Hall of the Los Angeles Convention Center (LACC). Based on information provided by convention center representatives and the stadium’s development team, the West Hall is to be demolished for the construction of the stadium and replaced with a new West Hall. The new West Hall will replace some of the LACC’s dated facilities and provide the convention center with a larger, more contiguous space. In addition, the LACC is anticipated to undergo a general enhancement program. The proposed Farmer’s Field is also planned to be used by the LACC for future events. With the modernization of the LACC and the addition of the stadium, Downtown Los Angeles is hoping to become one of the top-five convention and meeting destinations in the United States.
    • Century Plaza Redevelopment – On January 15, 2013, the Los Angeles City Council unanimously approved a 15-year development agreement and an environmental impact report for the $2 billion plan to redevelop the Hyatt Regency Century Plaza and build two 46-story residential towers as part of a 1.5-million-square-foot, mixed-use redevelopment project. The developers, New Century Associates, had originally acquired the Hyatt in 2008 and had planned on demolishing the hotel for the construction of a new mixed-use development. However, following strong opposition from city officials and residents, the developers presented a new design in August 2010 that included the hotel building with 394 modernized guestrooms and 63 high-end apartments; two residential towers; a 100,000-square-foot shopping plaza; and two acres of open space with fountains and walkways. Construction on this project is estimated to begin in early 2014.
    • Tech Growth in West Los Angeles’ “Silicon Beach” - Santa Monica has grown over the last several years to become one of the most popular cities in Southern California for start-up social media companies and has gained the nickname “Silicon Beach.” Yahoo! Media Group was the first major tech firm to move to the area in 2005, and other major tech firms such as eHarmony (late 2010), Riot Games (May 2011), BeachMint (June 2011), and Hulu (late 2012), have followed suit and have also opened offices in Santa Monica. Tech driven demand has been so strong that surrounding cities have started to see an increased presence of tech/social media firms, with Google relocating from Santa Monica to a new office in Venice Beach (late 2011); Facebook opening an office in Playa Vista (late 2011); and 72andSunny and YouTube acquiring office space in Marina Del Rey (late 2012).
    • Los Angeles International Airport’s New Tom Bradley International Terminal - In February of 2010, construction began on the Bradley West Project, a long-awaited major modernization of the Tom Bradley International Terminal. The $1.5 billion project will create a new world-class terminal that will offer travelers the very best in airport amenities, adding over 1,179,000 square feet of shops, restaurants, and passenger lounges, as well as new security screening, customs and immigration, and baggage claim facilities. The terminal's existing two concourses will be demolished and replaced with a larger pair, inclusive of 18 gates. The first phase of the new Tom Bradley Terminal is scheduled for completion in spring 2013 and the second phase in winter 2014.
  • Orange County
    • Anaheim Convention Center’s “Grand Plaza” - The Anaheim Convention Center, the West Coast’s largest convention center, expanded its outdoor and special-event space by 100,000 square feet into a new multi-use venue area called the Grand Plaza. This project was completed in January 2013 and features expansive walkways, dramatic water features and fountains, seating areas, special lighting, and infrastructure necessary to support a variety of special events. The convention center developed the Grand Plaza to improve the arrival-experience at the center, as well as to provide a unique multi-functional outdoor space that can be used year-round.
    • Disney’s Improvements to California Adventure - The California Adventure Park has undergone major renovations and improvements since 2008. The remaining renovations were completed in the summer of 2012, and included several new attractions, including “The Little Mermaid – Ariel’s Undersea Adventure,” “Goofy’s Ski School,” and “Cars Land,” an area inspired by the Disney-Pixar movie “Cars.” These new attractions reportedly boosted visitation in 2012 and are anticipated to help be strong drivers for visitation in 2013.
  • San Diego
    • San Diego Convention Center Expansion - In early 2010, the San Diego Convention Center acquired six acres of land along the bay and adjacent to the current facility, thus allowing a Phase III expansion to move forward. In October 2012, the Port of San Diego and the City of San Diego approved the Final Environmental Impact Report. The final approval left is to come from the California Coastal Commission, which is anticipated to take place in early 2013. The proposed convention center expansion is anticipated to include more than 220,000 square feet of exhibit hall space, 101,500 square feet of meeting rooms, and 78,000 square feet of ballroom space. In addition, the project is expected to include a five-acre rooftop park/plaza, 45,000 square feet of retail space, and a 500-room expansion of the Hilton San Diego Bayfront Hotel. Following approval from the California Coastal Commission, this expansion is estimated to be completed in 2016.
    • San Diego International Airport’s “Green Build” - In July 2009, the San Diego Airport Authority approved a $1 billion expansion of the airport, the largest expansion in the airport’s history. Referred to as the “Green Build,” the proposed expansion plans include the addition of 10 new jetways in Terminal 2, a conversion to a bi-level “departures and arrivals” terminal, expanded dining and shopping options, and improved security gates. The project is currently under construction and is anticipated to be completed by summer 2013. Additionally, the expansion project is being planned with materials and designs with the goal of attaining silver certification with leadership in energy and environmental design (LEED).
All of these developments are anticipated to help support new hotel development in each of their respective markets, as well as improve the economic environment for the overall Southern California region. In addition to the improving economic conditions for new hotel development, major hotel transactions in Southern California continue to remain active and achieve high prices on a per-room basis.

According to the transactions that HVS confirmed as of the date of this article, Figure 2 below shows the major hotel transactions (greater than $10 million) between 2000 and 2012.

Figure 2 – Major Hotel Sales Transactions in Southern California

Source: HVS

Based on preliminary data, Southern California recorded $931 million in major hotel transactions in 2012. The distribution of the 2012 major transaction is presented in Figure 3 below.

Figure 3 – 2012 Major Hotel Sales Transactions in Southern California

Source: HVS

Similar to other parts of the United States, major transactions in Southern California declined in 2012 over 2011. Nonetheless, 2012’s average price per room was the second highest ever recorded by Southern California, second only to the average price per room of $240,000 recorded previously in 2011. This can be attributed to continued improvement in hotel performance, a low cost of capital and hotel investors’ strong desire to gain assets in the Southern California market.

The following figure presents the market’s ten largest hotel transactions in 2012, based on total price.

Figure 4 – Southern California Hotel Transactions– 2012’s Largest Hotel Transactions

Source: HVS

Additional details regarding some of the most notable major transactions in 2012 include:
  • The transaction largest price of 2012 was the June 2012 sale of the Loews Hollywood (formerly the Renaissance Hollywood Hotel) at a purchase price of $169 million, or approximately $171,000 per room. Loews Hotels & Resorts purchased this property from CIM Group as part of a strategic plan to further expand the Loews brand.
  • LaSalle Hotel Properties added a fifth San Diego hotel to its portfolio by acquiring the L'Auberge Del Mar Resort & Spa in late 2012 for $76.9 million, or roundly $641,000 per room, at a reported overall cap rate of 6.0%. The original owners, Lowe Enterprises Investors, spent roundly $25.8 million ($215,000 per room) on extensive renovations between 2007 and 2009. The L’Auberge sale represented the highest price paid on a per-room basis for the year in all of Southern California.
  • One of San Diego County’s most notable 2012 transactions included the Hyatt Regency Mission Bay Spa & Marina. The Hyatt is subject to a long-term ground lease with the City of San Diego and was sold to Chesapeake Lodging Trust in September 2012 for $62 million, or roundly $145,000 per room, with a reported overall cap rate of 5.7%. It should be noted that the sellers of the property, an affiliate of Bentall Kennedy, had originally purchased the property in early 2006 for $60 million, or roundly $140,000 per room, and invested an additional $67 million to conduct a property-wide renovation and refurbishment in 2006 and 2007. However, the timing of the renovation and the recent economic recession prevented the seller from recouping their total investment.
Conclusion
Southern California is one of the nation’s most diverse lodging markets, but is underserved in terms of rooms supply relative to its population base, numerous demand generators, and millions of annual visitors. Southern California has rebounded from the previous economic recession, with major hotel transaction prices remaining high and several developments in the region helping to pave the way for a new era of economic growth and hotel development. With hotel values now exceeding the cost of constructing new lodging product in several sub-markets, investors are faced with various options for entering in the lucrative Southern California region.

About the Author

Leah Dauer Murphy is a Vice President with the HVS Los Angeles office. She is a California state-certified general appraiser and also holds two degrees with Washington State University, including an M.B.A. from the College of Business and a B.A. from the School of Hospitality Business Management. At HVS, Leah performs appraisals, feasibility studies, and consulting assignments on hotels and resorts throughout the United States and abroad. Ms. Murphy can be contacted at: +1 (424) 208-1261 direct or  ldmurphy@hvs.com

About HVS
HVS is the world’s leading consulting and services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 1980, the company performs more than 2,000 assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. Through a worldwide network of 30 offices staffed by 400 seasoned industry professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. For further information regarding our expertise and specifics about our services, please visit www.hvs.com.
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Contact: 

Leah Dauer Murphy
+1 (424) 208-1261 direct
ldmurphy@hvs.com


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