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:
- 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.
- 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
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
[email protected]
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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