In conjunction with the Phoenix Lodging conference, Jones Lang LaSalle Hotels released Hotel Intelligence Los Angeles, the first in its series of U.S. hotel market reports which identify market trends and investment opportunities. As a key global gateway market with a gross metro product approximately equivalent to the 20th largest economy in the world, the Los Angeles hotel market, made up of over 98,000 rooms spread out over 20 submarkets, is the target of significant investor interest. This fact is evidenced by the large number of high-profile properties that have traded in the last cycle and the growing list of high profile assets currently on the market including the Sheraton Universal and Sheraton Delfina.
The outlook for hotel investors in Los Angeles is positive. “Demand fundamentals, particularly in the key group and corporate segments, continue to improve and the area’s supply pipeline will remain in check for years to come given the lack of available construction debt financing and investors generally seeking significant discounts to replacement cost via acquisitions,” says John Strauss, a managing director for Jones Lang LaSalle Hotels in Los Angeles. “Hotel deals have already increased more than fourfold from the minimal 2009 volumes, reaching $154 million year-to-date in 2010.”
Asian-based investors accounted for 70 percent of the acquisition volume in 2010 through the acquisitions of the Marriott Los Angeles Downtown and the L’Ermitage Beverly Hills. The two most active buyer profiles for California real estate are U.S. REITs, who have had recent successful capital raises, and offshore buyers, primarily from Asia, who have a long-term hold strategy. As hotel cash flows continue to improve off the unprecedented declines in 2009 and debt becomes increasingly available, private equity firms that leverage acquisition financing to achieve their targeted return will gradually re-emerge albeit with lower leveraged return hurdles in this cycle compared to the prior cycle.
Investors looking for hotel product today are most attracted to brand unencumbered, fee-simple opportunities that are being offered at significant discounts to peak values and replacement costs. However, many “big box” and high-profile hotels in Los Angeles are held by well-capitalized, long-term owners who are able to navigate the downturn or conversely restructure or extend debt for several years, says Strauss. The report reveals a key investment opportunity in Los Angeles. In the downtown areas of Los Angeles, Hollywood, Beverly Hills, and Santa Monica, there are just three upscale branded focused service assets. This marks a stark difference from the core urban areas of New York and Washington, DC, which currently are home to approximately 10 such hotels. Los Angeles remains a sought-after lodging investment destination. Recent upscale and luxury supply additions and renovations at high-profile assets are expected to help lift average daily rates in the market. Both domestic and international investors, in particular investors from Asia, continue to vie for opportunities in the market. Los Angeles’ status as a key U.S. international gateway market and rising hotel fundamentals will lead to increased investment volumes in the market.
