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California remains popular, challenging for development

  • Author:NJC
  • Release on:2017-08-02

California remains popular, challenging for development

As hotelnewsnow.com latest news shows, demand for hotels continues to develop in California and supply issues at some point can overcome the state’s protective high barriers to entry。

Flowing is the view of Alan Reay (president of Atlas)
“The average size of hotels opening is 130 to 140 rooms and a vast majority of them are branded under Marriott International, Hilton or Hyatt Hotels Corporation. They typically cost more than $100,000 a key.

We might see in San Francisco what we have seen in downtown Los Angeles over the last 24 months

Downtown LA is one of a few areas that can handle higher density and the city has been supportive of new hotel development with tax breaks.
It’s generally difficult to find available land in locations anywhere near a beach”

Following is the view of Corry Oakes (CEO of OTO Development)
California remains a hot state for hotel development. 

The state overall has had a prolonged period of above-normal market performance, Oakes said. But, on a micro level, the hotel industry is still a street-corner business that can vary depending on the specific location

California’s hotels seem to be more susceptible to violent performance swings than hotels in other states, he said. During the 2001 recession, the decline in revenue per available room in California was multiple times what it was for the rest of the country. Similarly, in 2008 and 2009, California was “substantially worse” than other states
If you can handle the violent swings, it’s great business. If you happen to time the swings wrong or your balance sheet can’t handle the stress of missing performance projections pretty significantly, it can be a tough situation.

OTO’s real-estate team spends a lot of time trying to understand supply in the market.
Barriers to entry create lengthy development processes and less-experienced developers will misjudge that timeframe.

Following is the view of Mike Bellisario (VP and equity research senior analyst at Robert W. Baird & Company)
Developers believe if they can find the right piece of land in the right location in California, someone will try to build there,

Regardless of the supply structure, developers are always going to find a way to develop. There’s always someone who’s going to give them some money.
Barring a downturn in the fundamentals, which hasn’t happened yet, development will continue in California, noting markets in the state are performing better because of the limited supply coming in, which is due to the structure of the state, zoning laws, taxes and bureaucracy.

The demand is still strong among consumers, which is a big part of the reason developers and owners still want to build hotels in California. His long-term view is that conditions will remain favorable, because everyone wants to be in California.
Still, some recognize it’s hard to build there and don’t want to commit to the extra time and effort it takes to complete a project, which helps buffer against supply

Following is the view of Altas Hospitality’s Reay
Revenue-per-available-room growth is flattening out, Atlas Hospitality’s Reay said, and the cost of construction in the state continues to rise quickly. The development of retail and residential real estate adds on to the cost of labor and materials. Construction costs are 25% to 30% higher than they were 12 months ago.

Everyone is on full employment on the construction side. People are putting bids out. (Construction) companies are saying, ‘I don’t want the business, but if you’re willing to pay me this, I’ll take it.’”

OTO Development sees construction prices jump dramatically in California, unlike other markets across the country. Those who aren’t in the market every day might not fully appreciate this.

Obviously it’s a wonderful market for real estate development from a long-term perspectiv. Right now, all contractors are very busy.

California overall can absorb the new supply of hotel rooms that have recently opened and are currently under construction and it won’t have a negative effect on revenue and profitability. He is concerned about projects in the early planning stages, however, since they won’t be coming online until 2020 and later. It depends on the economy and how it continues to grow.

I think in the short term we’re OK, but long term, I would definitely be more cautious.
Older properties won’t fare as well as newer hotels coming online. The hotels with owners who haven’t kept up and invested back into their properties will suffer, he said.
“Business will gravitate toward a newer product. We may very well see a number of hotels exiting the market, either torn down or reconfigured for something else.

California is trying to find housing for lower-income families and the homeless,  and a number of cities are looking at older hotels as possible solutions.

Overall the state will see a positive growth pattern, but there might be some balancing as some inventory is removed from the market. The pace of hotels leaving the market is not nearly as fast as that of newer product coming up. There might have been 10 to 15 hotels shut down for code violations or demolished  within the last 12 months.

Following is the view of Todd Turner (VP of real estate at OTO Development). 
In the Los Angeles market, specifically, there has been limited supply growth of about 1% for the past five years.

That’s a big change attributed to supply.