Plenty of room at the inn
September 7, 2016

The Los Angeles hotel market isn’t huge by comparison with that of New York or Chicago, but developers appear to be intent on rectifying that. With nearly 100 hotels planned, many of them for the city’s central business district, some market watchers are starting to talk about oversupply.

Yet the hotel companies themselves clearly remain bullish on L.A.’s prospects, particularly in the downtown area. Some 5,468 keys out of a total of 11,120 in the pipeline for Los Angeles County are planned for DTLA, according to an analysis by The Real Deal in late August 2016 that included proposed projects as well as hotels that were under construction.

“There are a lot of hotels in different states of development right now,” said Arash Azarbarzin, president of the SBE Hotel Group, a Los Angeles-based hospitality company. “If all of them get built, there would be saturation for a period of time. But what I’ve learned in the hospitality industry is that as more hotels come into the market, so do more companies.”

Demand is robust, in large part due to strong job growth and new companies moving to L.A. Occupancy is expected to remain steady at around 80.5 percent — that’s more than 10 percent higher than the long-run average of 68.9 percent. By the end of the year, L.A. could see a 7.8 percent increase in revenue per available room, or RevPAR, compared with a national growth rate of 4.2 percent, according to a June market forecast by CBRE.

To be sure, the huge number of hotel rooms in the pipeline has started to make some lenders cautious. Real estate experts say that developers are having to reach more to finance all kinds of L.A. projects, not least among them new hotels. Industry insiders tell TRD that banks are requiring developers in L.A. to put up more equity, accept higher borrowing rates and provide stronger guarantors in order to secure construction loans.

“I would say the biggest hurdles right now are going to be organizing your capital, financing your construction,” said Cara Leonard, who works in the hotel investment banking platform of Savills Studley, a London-based real estate services firm, as a senior managing director in the L.A. office. “A lot of lenders are taking a step back and saying, ‘We don’t want to be overexposed.’”

Yet developers are sticking with the sunny market forecast...

Plenty of room at the inn

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