HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA

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1 SEPTEMBER 2013 $500 HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA Jessica White Analyst HVS Los Angeles 879 West 190 th Street, Los Angeles, CA 90248, USA

2 Santa Monica has gone from beach town to boom town over the past two decades. From the advent of Silicon Beach to the tourist mainstay of the Santa Monica Pier, the city has emerged as a hot spot for development in the greater Los Angeles area. To the west of, yet very much a part of, Los Angeles lies the city of Santa Monica (population 91,812 1 ) a politically progressive community that nurtures a high quality of life. The city recently won the Bloomberg Philanthropies Mayors Challenge award for The Wellbeing Project 2, which aims to measure the wellbeing of its citizens and to promote healthy lifestyle initiatives. With its palm tree-lined streets, ocean views, and convenient access to major freeways, bus lines, and airports, Santa Monica is an attractive location for residents and tourists alike. AREA ECONOMICS The entertainment industry represents a significant source of revenue and employment for the Santa Monica area. MTV Networks, Universal Musical Group, and Lionsgate Universal are a few firms that conduct business there. Secondary to the entertainment industry, technology start-ups and social media companies have a growing presence and the area around Santa Monica and Venice is now coined Silicon Beach. Technology giants such as Google, Apple, and Microsoft have opened branch offices in recent years, and some 500-newcomer ventures have taken root. The Silicon Beach culture, unlike Silicon Valley's, is more consumer-oriented, drawing on art, entertainment, and commerce to explore the intersections between technology and gaming, fashion, advertising, and video. The lifestyle, amenities, entertainment, and tech industries continue to draw companies to Santa Monica. In August 2013, tech giant Intel announced it will be relocating its content and services team to a new Colorado Street location 3. OFFICE SPACE STATISTICS FOR SANTA MONICA RELATIVE TO THE GREATER LOS ANGELES AREA 15.1% 15.2% 15.7% 16.0% $ % $ % $ % 9.2% 10.7% 10.6% 10.0% 9.9% $20 $10 5.9% 6.0% $ * Santa Monica Greater Los Angeles (forecast) Source: REIS Average Asking Lease Rate 18% 15% 12% 9% 6% 3% 0% Vancacy Rate (%) 1 U.S. Bureau of the Census, Population Estimates Program (PEP). Updated annually HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA PAGE 2

3 According to 2Q2013 REIS office space data, Santa Monica registered the third lowest vacancy rate (10.1%) behind Century City and Beverly Hills. In terms of average asking lease rate, Santa Monica s $47.68 per ft 2 was closely matched to Century City and Beverly Hills, and was $7.53 higher than the fourth place West LA market. Note that as Los Angeles vacancies have risen in recent years, Santa Monica has continued to attract tenants resulting in a relatively low vacancy rate. Forecasts for the remainder of 2013 illustrate a continuation of this trend. While it is important to note that changes in available office space affect vacancy and average asking lease rates, these data points give an overview of Santa Monica s desirability relative to the Greater Los Angeles area. DEMAND GENERATORS Tourist Attractions Santa Monica Beach Santa Monica Pier Santa Monica Farmers Market Santa Monica History Museum Venice Beach Annenberg Community Beach House Montana Avenue Palisades Park California Heritage Museum Santa Monica Museum of Art Muscle Beach Santa Monica International Beach Festival Main Street Santa Monica Playhouse Source: Santa Monica Convention and Visitors Bureau MAJOR DEVELOPMENTS While industry represents an important component of the economy, tourism truly drives Santa Monica. According to the Santa Monica Convention and Visitors Bureau (SMCVB), tourism generated $1.5 billion in revenue in 2012, an increase of 9.6% over the previous year. This was a result of 7.3 million tourists who visited Santa Monica from outside of Los Angeles County, 57% of which were international visitors. The tourism industry is supported by the city s yearround attractions, such as the Santa Monica Pier, plus its numerous festivals and events. The annual American Film Market is a staple of the Santa Monica events calendar where 8,000 attendees convene to sell, finance, and acquire films. The city s Transient Occupancy Tax rate stands at 14% and brought in $39.3 million to the city s General Fund in Corporate demand from the entertainment industry and Silicon Beach, coupled with numerous tourist attractions, has solidified the city as a travel destination. Various development projects sponsored by both the city and private developers have been planned in order to better meet the demand for one of the top ten beach cities in the world 5. While the city has historically had a reputation for slow growth, Santa Monica is in the midst of a development renaissance driven by the increasing number of visitors and the city s vision of being the premier beach city destination in the world. 6 The city has taken on several infrastructure projects including the refurbishment of the Santa Monica Pier and City Hall, plus a $55 million public parks project. Currently, 2,000 housing units are under construction. More than 45 projects have applied for development agreements and are in various stages of approval. The city s Planning Commission is revisiting its height and density zoning limits as part of its review of their Downtown Specific Plan. This planning process was initiated in 2011 and is expected to be adopted in early Spring 2014 after the CEQA analysis and public comment periods are complete. 4 Santa Monica 2012 Tourism Economic & Fiscal Impacts and Visitor Profile, Santa Monica Convention and Visitors Bureau. 5 National Geographic, 6 Santa Monica Convention and Visitors Bureau website. HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA PAGE 3

4 The (t)expo Line expansion is one of the most highly anticipated projects in the city. The Line currently runs from Downtown LA to Culver City and will be expanded to Santa Monica, easing area traffic. Tax incentives are being offered to spur development on the city-owned land along the line with the goal of creating public-private "innovation hubs. Construction on Phase 2 began in April 2013 and should be completed by late The Village at Santa Monica is a $350 million mixed-use development located on Ocean Avenue between Colorado and Pico. The three separate buildings include 318 luxury condominiums, affordable housing apartments, 20,000 square of retail and restaurant space, and walkable plazas and gardens. The project is scheduled to be complete in early CITY OF SANTA MONICA MAJOR DEVELOPMENT TIMELINE 2013 Parking Structure 6 Civic Center Parks 2014 Civic Center Village Pico Library Santa Monica Pier Renewal The Village at Santa Monica 2015 (t)expo Santa Monica Terminus California Incline Replacement Colorado Esplanade Buffer Park City council is currently reviewing proposals to develop a 2.5-acre city-owned site as an unnamed mixed-use project. Situated on Arizona Street between Fourth and Fifth Streets, it will include a combination of retail, cultural, office, hotel, and residential uses. The city hopes to add a cultural aspect within the development by stipulating programmable gathering space that could host public gatherings and seasonal activities for the neighboring community, while preserving space for the city-hosted ice-skating rink that occurs at that site each winter. A parking lot and two banks currently occupy the parcel. The Ocean Avenue Project, a high-profile 22-story mixed-use tower designed by Gehry Partners, is to be located on the corner of Ocean Avenue and Santa Monica Boulevard. Plans were submitted for development approval on February 28, 2013, and include a twisting white tower with ground-level retail and restaurants, upper-level apartments, condos, and hotel component. The project also contains an observation deck and a museum. With the height and scale of the project exceeding current zoning limitations, there has been significant opposition from community members. It is currently on hold while the city council works with the developer to find a compromise on scale. HOTEL SUPPLY Santa Monica continues to attract strong interest from hotel developers and investors. The market currently holds 34 hotels consisting of 3,483 hotel rooms. 7 The two largest hotels are the 342 room Loews Santa Monica, and the 310 room Le Meridien (formerly Sheraton) Delfina. Most of the hotels are located on or near Ocean Avenue. The most recent hotel opening was the 36-room Palihouse Santa Monica in June 2013, the fourth hotel location in the Los Angeles area for the Pali Group, an independent hotel developer. HVS estimates 5 proposed hotels with 772 units currently in the pipeline. 7 Sources: HVS and Tripadvisor. HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA PAGE 4

5 HOTEL DEVELOPENT SUMMARY Proposed Property # of Rooms Est. Opening Date Product Type Development Stage 710 Wilshire Hotel 285 Jan 2017 Full-Service Approved Courtyard by Marriott 136 Feb 2016 Select-Service Pending Planning Commission review Hampton Inn & Suites 136 4Q2015/1Q2016 Select-Service Pending Planning Commission review Bergamot Hotel Full- Service Early Development Ocean Avenue Project Full- Service Early Development Proposed Redevelopment: Fairmont Miramar NA Full- Service Environmental review Wyndham NA Full- Service Early Development Source: HVS 710 Wilshire Hotel The Wilshire Boulevard Project at Wilshire and 7th Street is a full-service 285 room hotel project 10 that will refurbish the existing building and add an additional building to the parking lot onsite. Plans include ground-level retail space. The project has been approved and is scheduled to open in Other Developments Several hotel projects are in various stages of development and involve 772 proposed hotel rooms. 11 Two select-service hotels CURRENT AND PROPOSED HOTEL SUPPLY 4,400 4,200 4,000 3,800 3,600 3,400 3,200 Source: HVS Current Supply Proposed Supply are currently under construction near 5th and Broadway, the Courtyard by Marriott and the Hampton Inn & Suites by Hilton. These hotels being developed by OTO Development, will be among the first new branded select-service hotels proximate to the beach in 20 years, and are anticipated to open in February Bergamot Hotel is a 90 room hotel that will be part of the Bergamot Art Station (not to be confused with the Bergamot Transit Village across the street) located near the (t)expo line terminus and may house the new home of the Santa Monica Museum of Art. As previously mentioned, the Ocean Avenue Project is slated to include a hotel component with 125 rooms to open in In addition to the proposed hotel rooms, two existing hotels have submitted redevelopment plans to the city. The Fairmont Miramar has proposed several versions of their plan to expand the existing property. The latest calls for the renovation of the historic Palisades building and the addition of a four-story building, a six-story building, and a 21-story tower with new hotel rooms, up to 160 residential condo units, and ground-level retail. The Wyndham hotel, formerly a Holiday Inn, has announced plans for a three-tower design ranging from 5 to 15 stories with a viewing deck 8 The Fairmont Miramar currently has 300 rooms; the planned redevelopment calls for 280 hotel rooms plus up to a total of 160 residential condo units. 9 The current structure on the site (former Holiday Inn) has 132 rooms; the current redevelopment plans contain 211 rooms /07_22_2013_Two_Small_Hotels_in_Downtown_Santa_Monica_Spark_Labor_Concerns.html 11 Santa Monica 4 th Annual Travel & Tourism Summit Presentation, HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA PAGE 5

6 on each tower. Upon completion, the owner and developer FelCor Lodging Trust s $255 million project would include 211 hotel rooms and 25 residential units. However, it s worth noting that both projects are in the early planning and approval stages and have received significant push back from city planners and Santa Monica citizens which may result in extended project timelines. In July 2013, it was announced that the Sheraton Delfina will be reflagged Le Meridien Delfina Santa Monica. An undisclosed amount will be invested to refurbish the property to feature the signature Le Méridien Hub lobby experience, large-scale artwork, and other upgrades. HOTEL MARKET PERFORMANCE Santa Monica is currently one of the strongest lodging submarkets in the United States. Based on a select set of lodging facilities surveyed by HVS in the market area, Santa Monica hotels in 2012 operated at an average occupancy rate of 83.9% with an ADR of $255.89, representing a year-overyear increase from 2011 of 2.7% and 5.5% respectively. The market s 2012 average RevPAR was $214.76, an increase of 8.3% over the previous year. This puts it on par with the top two markets in the US for ADR New York City and Oahu. According to the California Lodging Industry Performance published by CH&LA and STR, the Santa Monica/Marina del Ray market year-to-date for June 2013 shows occupancy at 81.3% with an ADR of $ and RevPAR of $ This market has the highest rates across the board in all of California. 13 HVS projects average occupancy for 2013 to remain close to 85%, with positive ADR (+6.5%) and RevPAR (+8.1%) trends to continue. Since 2004, market-wide occupancy levels have stayed in the high-70 to low-80% range. Even at the bottom of the recession, occupancy rates in Santa Monica hovered in the mid-70s, showing the strength of the market s lodging fundamentals. According to our market interviews, hoteliers are optimistic for the future of Santa Monica, even with the new supply anticipated to enter the market. For local context, the latest data for Los Angeles County (June 2013) show the occupancy rate for that month at 85.9% with an ADR of $ In year-over-year comparison, both occupancy rate and room rate rose slightly (0.9% and 4.5% respectively). 14 RECENT TRANSACTIONS Hotel sales in Santa Monica are relatively sparse when compared with all the recent development activity. Even so, high barriers to entry as a result of extremly high land costs and an arduous approval process make the purchase of existing hotels an attractive alternative to construction. The slow pace of hotel transactions indicates the desirabilty of ownership in Santa Monica. Even with historic interest rate lows, hoteliers continue to maintain ownership in their profitable assets. SANTA MONICA HOTEL TRANSACTIONS Name Sale Date Buyer Room Count Price Price Per Room Viceroy Santa Monica Hotel Mar 2011 LaSalle Hotel Properties 162 $80.1 mil $494,444 Sheraton Delfina Santa Monica Nov 2010 Pebblebrook 310 $102.8 mil $331,613 Source: HVS 12 June 2013 California Lodging Industry Performance, STR and California Hotel & Lodging Association. 13 Ibid. 14 Econowatch L.A. County, Los Angeles Business Journal Data Bank, September 2, HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA PAGE 6

7 Patience can be profitable: prior to its 2011 sale, the Viceroy last sold in June 2000 for $27.6 million, or $164,286 per room. Those owners invested an additional $20.3 million to renovate the property, reopening in The Sheraton Delfina last sold in March 1990 for $28.0 million, or $90,615 per room. CONCLUSION With its attractive oceanside location, robust entertainment and technology industries, multiple tourist demand generators, and high barriers to entry, Santa Monica should continue to be a bright spot in the Greater Los Angeles area for commercial development, particularly hotels. While the city and its citizens continue to work with developers on the scale of proposed projects, it is clear that the Santa Monica landscape is poised to experience a sea change in the coming years. HVS HOTEL MARKET INSIGHT: SANTA MONICA, CA PAGE 7

8 About HVS HVS is the world s leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries. Established in 1980, the company performs assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 30 offices and 450 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. Superior Results through Unrivalled Hospitality Intelligence. Everywhere. About the Author Jessica White enjoys combining her real estate background, finance education, and passion for hospitality as a Consulting & Valuation Analyst at HVS Los Angeles. Jessica joined the firm in 2012 after graduating second in her class from the Masters in Hospitality Administration program at Ecole Hôtelière de Lausanne in Switzerland. Specializing in upscale and luxury hotels in the Los Angeles area, she has appraised properties from Santa Monica to North Hollywood, as well as the remainder of California, Oregon, and Arizona. Outside of the office, Jessica can be found training for her next marathon or hiking in the Santa Monica Mountains. HVS LOS ANGELES, newly opened in 2013, is located in the South Bay region of the Los Angeles area and is readily accessible to the numerous hotel and resort markets located throughout Southern California. While the HVS San Francisco office has been servicing the Southern California market for over 25 years, the time was right to expand our platform given the revitalized hotel development and transaction activity in this region. The HVS Los Angeles team, under the direction of Suzanne Mellen (San Francisco) and Leah Dauer Murphy (who is the on-site practice manager), has diverse academic backgrounds and hotel-related experience, and in-depth expertise in the numerous and varied hotel markets of Southern California. HVS 879 West 190 th Street, Ste. 400, Los Angeles, CA 90248, USA