The Los Angeles/Orange County Lodging Markets Are Back!

Transcription

1 The Los Angeles/Orange County Lodging Markets Are Back! Mitchell Roberts, Director HVS International San Francisco/Los Angeles HVS INTERNATIONAL 4929 Wilshire Boulevard Suite 83 Los Angeles, CA, (323) tel. +1 (323) fax January 25 New York San Francisco Boulder Denver Miami Dallas Chicago Washington, D.C. Weston, CT Phoenix Mt. Lakes, NJ Vancouver Toronto London Madrid New Delhi Singapore Hong Kong Sydney São Paulo Buenos Aires

2 The Los Angeles/Orange County Lodging Markets Are Back! By Mitchell Roberts, Director HVS International San Francisco/Los Angeles The Southern California lodging market, consisting of hotel products in Los Angeles and Orange Counties, expects a banner year for 24. This is the first time in the past 12 years that occupancy has grown considerably, and average rates are following suit. This article will examine the condition of the overall markets, as well as a few of the more dominant submarkets. Los Angeles County The Los Angeles County market entered the 199s in a recessionary environment. The Japanese-investment bubble of the mid- to late-198s had burst. Commercial real estate values were declining, as many purchases were made on financial expectations that either never materialized or were beyond aggressive optimism. Many of the local industries, including aerospace, were in recessionary cycles. Southern California went through a wrenching adjustment to the downsizing of the military in the post-cold War era. Military aerospace contracts no longer fueled the Los Angeles economy, and a deep redession took hold. Numerous new hotels had been built in the mid-198s, driven by the favorable tax policies of that time, and, due to local business conditions, occupancies were suffering. As indicated in the Table 1, which includes all hotels in Los Angeles County, the overall county occupancies grew slowly from the high-5% level in 1992 to 72% in 2, just prior to September 11, 21. Unlike other parts of the country, most lenders had serious concerns about the Los Angeles market throughout the 199s and few construction loans were made; as a result, supply growth was anemic. As indicated in the Table 1 and graphically illustrated in Table 2, between 1992 and 23, supply grew at a paltry.4% per year on a compound annual basis. The table also indicates that, with demand growth and virtually no new supply, occupancies had a chance to recover gradually. In spite of moderate annual occupancy growth, average rate growth was above inflation for a number of years, as indicated in Table 3. September 11, 21 put a dent in the overall market, decreasing demand and average rate growth; but the market is now emerging strongly from its downward effects. The local economy has strengthened, and airline passenger counts have grown considerably this year. As a result, demand grew 6.9% for the first 11 months of 24, while the average rate increased 6.1% more than double the inflation rate. Hoteliers expect that both occupancy and rate will continue to grow significantly in the next few years, with little supply growth on the horizon. As this market recovery goes into full swing, a difference not seen in previous recoveries will increase occupancy even more than expected. Previously, many of the area hotels exhibited strong weekday demand, due to the corporate and group markets, and a softer weekend demand. Following the terrorist attacks on September 11, 21, many hotels began targeting the leisure base in an effort to increase occupancy, as the corporate base was severely diminished. This helped to increase the weekend occupancies, and Saturday night became the strongest day of the week. Now that the corporate base has returned and the leisure base remains, occupancy levels are spread evenly from Tuesday to Saturday nights, with Sunday and Monday nights now exhibiting the lowest occupancies. According to Smith Travel Research, for the 12-month period between December 23 and November 24, daily occupancies from Tuesday to Saturday night were in the mid- 7% range, while Sunday and Monday fell below the 7% level. As the Southern California economy is expected to continue improving, there appears to be enough capacity (especially midweek) to raise annual occupancy rates above the mid-7% range. These trends indicate that the area is ripe for developers with access to capital. Any new project, if conceived properly, should be able to achieve a stabilized occupancy and rate level within a short period, barring any national calamities. We, likely, will see some limited- and focused-service products developed first, due to their lower capital costs with the full-service hotels development to follow, thereafter. Unauthorized duplication is prohibited without the express written consent from HVS International. Copyright HVS International 25

3 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 2 Table 1 Year Occupied Room Nights Historical Supply and Demand Trends Los Angeles County Change Available Change Occupancy Change Average Rate Change RevPAR Change ,829,846 33,843, $68.42 $ ,899,146.3 % 33,993,775.4 % 58.5 % (.1) % (.3) % (.4) % ,17, ,694,25 (.9) ,966,899 (.7) 33,563,786 (.4) 62.5 (.3) ,85, ,453,327 (.3) ,637, ,585, ,965, ,882, ,386, ,161, ,717, ,29, ,9,216 (6.6) 34,531, (7.5) (.8) (8.2) 22 23,4,787 (.2) 35,16, (2.) (1.8) 6.8 (3.8) 23 23,898, ,436, (1.5) Year-to-Date Through November 23 22,55,14 32,426, % $9.77 $ ,57,5 6.9 % 32,437,664. % % % % Average Annual Compounded Change: %.4 % 1.2 % 2.3 % 3.5 % Table 2 Historical Supply and Demand Trends Los Angeles County Room Supply Room Demand Occupancy 4,, 35,, 3,, 25,, 2,, 15,, 1,, 5,, YTD Nov. 24 YTD Nov. 23 Occupancy % Table 3 Historical Occupancy, Average Rate, and RevPAR Trends Los Angeles County ADR/RevPar ($) 6 4 Occupancy (%) Time ADR RevPar Occupancy

4 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 3 Anaheim/Orange County Market The Anaheim/Orange County market followed the trend of the overall Los Angeles market. As indicated in Table 4, occupancies remained at the 6% level throughout the 199s, then reached a plateau in 2, and declined after September 11, 21. The supply picture has not been as stagnant in Los Angeles County, at least since 2. Prior to that, there was very little increase in supply. Subsequent to 2, the overall county supply increased each year. Many of these hotels were located in the Anaheim market (particularly in the city of Garden Grove). Garden Grove, owing to its proximity to Disneyland, became a very favorable place to develop hotels due to a significant transient occupancy tax rebate. Since 2, over 1,3 rooms opened in Garden Grove. Overall occupancy reached levels above 7% in 24 the highest occupancy level since 2. Additionally, demand grew at a healthy pace in 23 and 24. The tables that follow show growth in supply and room night for the entire Anaheim/Orange County market demand since Table 4 indicates supply has grown at a faster pace than that in Los Angeles County, but demand has kept pace. Between 1992 and 23, supply grew at a compounded annual rate of 1.3%, while demand grew at 2.1%. Tables 4 and 5 indicate that both 23 and 24 experienced greater demand growth than supply growth. If this trend continues and new supply enters the market, the occupancies should not be affected greatly. Table 6 shows the continued increase in ADR and RevPAR for the market. As developers plan new supply, a comfort level will emerge from the realization of continued demand growth. The market is dominated by the Anaheim area, due to both the Disneyland Resort and the Anaheim Convention Center. Disney, in an effort to foster attendance and, hence room night demand, typically plans a new ride or event every few years. In 25, Disneyland will celebrate its 5-year anniversary, with special events planned throughout the year. Inherently represented in these tables is the south- Orange County resort market stretching from Huntington Beach to Dana Point. Hotels in that market have done considerably well over the last few years, and, although more difficult to develop a resort product, any new supply should be absorbed relatively quickly. The Newport Beach Marriott is in the midst of a $6 millionplus makeover in order to capitalize on these market dynamics. Table 4 Year Historical Supply and Demand Trends Anaheim/Orange County Occupied Change Available Change Occupancy Average Rate Change RevPAR Change ,197,667 16,737, % $61.82 $ ,621, % 16,893,981.9 % % % ,54,439 (1.1) 16,953, ,222, ,966, ,547, ,881,962 (.5) ,165,641 (3.3) 16,677,953 (1.2) ,863,62 (2.7) 16,772, ,15, ,923, ,951, ,981, ,916,943 (.3) 17,988, ,32, ,716, (2.9) (5.8) 23 12,881, ,353, Average Annual Compounded Change 2.1 % 1.3 % 3.6 % 4.5 % Year-to-Date Through November 23 11,866,11 17,7, $91.87 $ ,51, % 17,836,978.8 % % %

5 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 4 Table 5 Historical Supply and Demand Trends Anaheim/Orange County Room Supply Room Demand Occupancy 25,, 2,, 15,, 1,, 5,, YTD Nov. 24 YTD Nov. 23 Occupancy % Table 6 Historical Occupancy, Average Rate, and RevPAR Trends Anaheim/Orange County ADR/RevPar ($) 6 4 Occupancy (%) Time ADR RevPar Occupancy Downtown Los Angeles Market Performance of the downtown Los Angeles market mirrored that of the overall Los Angeles County market. Throughout the 199s, occupancy remained in the 5% to 6% range. A lack of conventions and a very small leisure market helped keep occupancy low. In addition, many corporate travelers, due to the lack of area amenities, would choose other locations during their stay in Los Angeles. As Table 7 indicates, there was little supply growth during this period. The table also indicates that as s result of greater corporate and group demand, overall demand increased a phenomenal 19% in 24, which contributed to a 1-point gain in occupancy, to 61.5%. Average rate growth, after achieving some significant gains between 1998 and 2, retreated to much lower levels. Tables 8 and 9 indicate that, although demand grew throughout the mid-199s, it has actually decreased in the last few years. The major question on the horizon is what effect the proposed Convention Center Hotel will have on the market. Will this hotel induce enough demand and enable more convention meeting planners to choose Los Angeles as their next convention destination? The city and the developer believe it will. The city is now willing to commit financial resources to the transaction. The 1,2-room hotel, coupled with a neighboring entertainment/retail development, will total 4,, square feet in the hope that it will attract enough Angelinos to play downtown. The remake of downtown San Diego worked, and now it s Los Angeles turn.

6 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 5 Table 7 Year Occupied Historical Supply and Demand Trends Downtown Los Angeles Change Available Change Occupancy Average Rate Change RevPAR Change ,238 1,635, % $94.59 $ ,437.4 % 1,782, % % (7.6) % ,1, ,782, ,16 (8.8) 1,776,391 (.3) (1.2) (9.5) ,37, ,718,785 (3.2) ,124, ,718, (.8) ,166, ,718, ,164,914 (.1) 1,718, ,168,48.3 1,718, ,438 (18.6) 1,72, (16.8) ,863 (7.1) 1,723, (7.3) ,89 (.7) 1,723, (8.9) (9.5) Average Annual Compounded Change.3 %.5 % 1.9 % 1.8 % Year-to-Date Through November ,481 1,577, $ $ , % 1,577,482. % % % Table 8 Historical Supply and Demand Trends Downtown Los Angeles Room Supply Room Demand Occupancy 2,, 1,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, YTD Nov. 24 YTD Nov. 23 Occupancy % Table 9 14 Historical Occupancy, Average Rate, and RevPAR Trends Downtown Los Angeles ADR/RevPar ($) Occupancy (%) Time ADR RevPar Occupancy

7 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 6 Westside Market The Westside market is Los Angeles most affluent market. It consists of luxury and upscale properties located in Beverly Hills, Bel Air, Santa Monica, Century City, and West Los Angeles. These hotels are internationally known, and the properties are both independent and branded. Historically, the hotels achieved the highest average rates of any hotels in the city. Demand in the market is primarily generated from the entertainment and financial industries and has seen dramatic improvement in both rate and occupancy in 24. Tables 1 and 11 illustrate the growth in Westside market s supply and room night demand since As indicated in Table 1, the market grew from a high- 6% market in the early 199s to a 7% market by the midto late-199s. The events of September 11, 21 had a profound impact on this market. Average rate growth posted significant increases through the mid to late 199s but actually turned negative after the terrorist attacks. As indicated in Table 12, both occupancy and average rate have grown considerably in the last year. Occupancy in this market has climbed to its highest level in the last six years more than it was in the banner 2 year. Table 11 indicates that, while supply has remained stable, demand is beginning to grow. This is an excellent sign. Supply growth was minimal over the last few years. In the last year, it actually decreased due to the renovations at the Beverly Hilton; and, in late-january 25, the St. Regis is expected to close, as owners plan to convert the structure into a residential condominium. The hotel was unable to compete effectively with the other luxury products, located in Beverly Hills and Bel Air. Developers have always liked this market, due to its average rate potential; however, it does have strong barriers to entry. Few remaining vacant sites are large enough to accommodate hotel development, and land costs are some of the highest in the city. Also, local residents are not always in favor of hotel development. With that said, the city of Beverly Hills recently approved the 214-room Montage Hotel, which will be located on Beverly and Canon Drives, north of Wilshire Boulevard. It will occupy the former site of retail stores and public parking lots. The mixed-use project will also contain a retail component, residential condominiums, and a large parking garage that will serve both the hotel guests and the general public. Due to the lack of available sites, developers and investors have concentrated on rehab projects, such as the Avalon, Maison 14, Hotel Crescent, and Mosaic, all located in Beverly Hills. Renovation projects will continue to attract the attention of developers in this market. We believe this market will continue to be the strongest in Southern California. As evidenced by the current occupancy levels, the market has reached its historical peaks, but could go higher depending upon the weekday growth. Daily occupancies are climbing up toward the 8% level, and Saturday nights are also exhibiting strong occupancy. As occupancies reach their daily peaks, the operators will concentrate on increasing the average rate. Combined with limited increases to supply, the average rate and RevPAR could skyrocket. Table 1 Year Historical Supply and Demand Trends Westside Market Occupied Change Available Change Occupancy Average Rate Change RevPAR Change ,45,755 2,217, % $ $ ,525, % 2,259, % % % ,556, ,266, ,61, ,233,978 (1.4) ,626, ,2,22 (1.5) ,647, ,24, ,578,371 (4.2) 2,248, ,653, ,364, ,733, ,446, ,489,886 (14.) 2,433,489 (.5) (.8) (14.3) 22 1,546, ,414,537 (.8) (3.4) ,639, ,444, (.9) Average Annual Compounded Change 1.4 %.9 % 3.9 % 4.4 % Year-to-Date Through November 23 1,523,424 2,236, $21.5 $ ,645, % 2,187,42 (2.2) % % %

8 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 7 Table 11 Historical Supply and Demand Trends Westside Market Room Supply Room Demand Occupancy 3,, 2,5, 2,, 1,5, 1,, 5, YTD Nov. 24 YTD Nov. 23 Occupancy % Table 12 Historical Occupancy, Average Rate, and RevPAR Trends Westside Market ADR/RevPar ($) Occupancy (%) Time ADR RevPar Occupancy Airport Market The Los Angeles Airport market is dominated by both major convention hotels and smaller corporate hotel facilities. This market has historically been considerably more successful than other Southern California submarkets, in terms of occupancy, due to the presence of the airline crew base. The market also is dependent on the corporate, group and leisure traveler. The proximity to the airport is a strong selling point for groups, eliminating the need to provide group transportation from the airport to the hotel. Table 13 indicates this market was on its way to becoming a very high occupancy market. It climbed from the 6% level in 1992 to 8% in 2. The events of September 11 changed that, but in 24, the market reached an occupancy level of 78%. The market average rate also climbed rapidly throughout the 199s but it, too, was affected by the events of September 11, 21. The year 24 saw a return to a strong growth rate of 8.3%. However, the base average rate ($7. to $75.) is considerably low, and the RevPARS remain low. With no new hotels under construction in the market, and increasing demand, developers could look to this market, although the caveat is the rate issue. The current average rates would not support new construction. Referring to the old standby, that $1 of ADR supports $1, of construction costs, a developer would need to build a $7, per room hotel, which is virtually impossible by today s standards in the Los Angeles area. Investors and developers would look to renovation opportunites as evidenced by proposed renovations at the Ramada Inn and Four Points in Culver City (peripheral airport market). There is definitely room for more.

9 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 8 Table 13 Year Historical Supply and Demand Trends Airport Market Occupied Change Available Change Occupancy Average Rate Change RevPAR Change ,469,997 5,262, % $59.24 $ ,349,973 (3.5) % 5,22,826 (1.1) % (2.1) % (4.4) % ,423, ,167,66 (.7) (.5) ,587, ,29, ,833, ,29,393 (.) ,873, ,18,337 (.6) ,99,86.9 5,212, ,957, ,281, ,263, ,331, ,995,95 (6.3) 5,447, (.2) 58. (8.4) 22 3,856,891 (3.5) 5,618, (6.9) 5.54 (12.9) 23 4,17, ,645, (4.1) Average Annual Compounded Change 1.5 %.6 % 1.6 % 2.5 % Year-to-Date Through November 23 3,781,675 5,168, $7.97 $ ,7, % 5,19,482.4 % % % Table 14 Historical Supply and Demand Trends Airport Market Room Supply Room Demand Occupancy 6,, 5,, 4,, 3,, 2,, 1,, YTD Nov. 24 YTD Nov. 23 Occupancy % Table 15 9 Historical Occupancy, Average Rate, and RevPAR Trends Airport Market ADR/RevPar ($) Occupancy (%) Time ADR RevPar Occupancy

10 HVS International ALIS 25 The Los Angele/Orange County Lodging Markets Are Back! Mitchell Roberts - 9 Conclusion The Los Angeles and Orange County hotel markets expect a banner year in 24. With limited supply growth over the past 1 years, and current strong increases in demand, average rates are expected to grow at a rate considerably above the rate of inflation over the next few years. These trends make both new-build and renovation development opportunities more feasible. 3 About the Author: Mitchell S. Roberts is a Director with HVS International San Francisco, heading up the Los Angeles facility. He has over 23 years of hospitality consulting, valuation and transaction experience. Mr. Roberts s expertise includes valuations of major hotel and resort properties, market and feasibility studies, operational reviews, market repositioning studies, renovation studies, restructuring of loan agreements, negotiation of management agreements and asset management. He has represented clients in the purchase and sale of lodging properties and conducted the entire due diligence process. Mr. Roberts holds a Bachelor s degree from the Cornell School of Hotel Administration and an M.B.A. from the Stern Graduate School of Business. He can be reached at: HVS INTERNATIONAL 4929 Wilshire Boulevard Suite 83 Los Angeles, CA, (323) tel. +1 (323) fax mroberts@hvsinternational.com About HVS International: Since 198, HVS International has provided hospitality services to more than 1, hotels throughout the world. Principals and associates of the firm have written textbooks and thousands of articles regarding all aspects of the hospitality industry, and literally wrote the book on how hotels should be valued.