LOS ANGELES The outlook for hotel investors in Los Angeles is positive, as demand fundamentals—particularly in key group and corporate segments—continue to improve, and the area’s supply pipeline will likely remain in check for years to come, given a lack of available construction debt financing and significant discount to replacement cost via acquisitions.
That summarizes Jones Lang LaSalle Hotels’ new market report on America’s second largest city. 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, comprised of more than 98,000 guestrooms spread across 20 submarkets, is the target of significant investor interest, evidenced by the large number of high-profile properties that have traded in the last cycle and a growing list of high-profile assets currently on the market, including Sheraton Universal and Sheraton Delfina.
Hotel deals have already increased more than fourfold from the minimal 2009 volumes, reaching US$154 million year to date. Asian investors accounted for 70% of the acquisition volume in 2010 through the acquisitions of Marriott Los Angeles Downtown and the L’Ermitage Beverly Hills.
The two most active buyer profiles for California real estate are U.S. REITs, which 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 as debt becomes increasingly available, private equity firms that leverage acquisition financing to achieve their targeted returns will gradually reemerge, 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,” says John Strauss, a managing director for Jones Lang LaSalle Hotels in Los Angeles. “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.”
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 City and Washington, D.C., 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 ADR in the market. Both domestic and international investors, particularly 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.
To request a copy of Jones Lang LaSalle Hotels’ report, visit www.joneslanglasallehotels.com or www.jllhss.com.