Los Angeles drives demand on a global scale thanks to its locale and growing convention business. Developers are taking note.
LOS ANGELES—With an expanding ability to welcome more convention business, a global appeal and a diverse set of surrounding neighborhoods that naturally drive demand, Los Angeles is on a development tear of late.
According to Atlas Hospitality Group’s “California Hotel Development Survey 2019 Mid-Year” report, four hotels totaling 505 rooms opened in Los Angeles County during the first half of the year. The county also leads California at 45 hotels with 7,497 total rooms under construction, according to the data.
“If you look at Los Angeles County, the bulk of new development is happening in the downtown market,” said Alan Reay, president of Atlas Hospitality Group. “Development has been huge because of the convention center expansion, the Staples Center, entertainment hubs, and commercial development in the office sector as well as residential. The city is really turning around downtown.”
STR data shows that LA's central business district has 27 hotels with 5,125 rooms slated in the pipeline. The reasons for the uptick in development are clear, according to Reay. STR is the parent company of Hotel News Now.
First, he said the city is seeing a lot of overseas investment, particularly from China due to proximity and a growing Chinese population in Southern California. Additionally, LA has been proactive in incentivizing developers with benefits such as tax rebates. And then, while some big cities have density issues and building height restrictions, LA does not. Reay said that means a 10,000- to 15,000-square-foot hotel can fit 200-plus rooms in its footprint.
“Outside of downtown LA, that wouldn’t even get developed,” he said.
Stephane Lacroix, GM of the Downtown LA Proper Hotel, opening late this year, said that tourism in LA generated billions of dollars last year, achieving record-breaking revenues two years ahead of schedule with growing demand from China and India. Visitors to the county funneled $23.9 billion directly into the LA economy, generating a record $36.6 billion in total economic impact, according to a report released by the Los Angeles Tourism & Convention Board. Those figures, along with the expanding convention center and luxury developments entering the market, are what get Lacroix excited for the future of the city and his hotel.
“Downtown LA Proper will benefit from year-round corporate, leisure and group travelers due to its diverse economy, cultural and recreational opportunities,” Lacroix said. “The growing inventory will finally allow LA to compete for some of the larger conventions currently booking in Las Vegas and San Francisco.”
For example, LA is one of the prospective cities to host the World Cup in 2026 and the city will host the Summer Olympics in 2028.
“The LA market should see tremendous growth with increased investments, infrastructure enhancements, and the addition of global Lifestyle brands such as Edition, Pendry and Park Hyatt,” Lacroix said.
Avi Brosh, founder of lifestyle brand Palisociety, said the Los Angeles market offers more than just downtown. His company has six hotels in the greater area with plans to open more. Most recently, the Palihotel Culver City opened its doors.
“Our biggest opportunity is the ability (to) service so many neighborhoods in the greater LA market, from Santa Monica to Silver Lake,” he said. “We love LA because it is a collection with well-defined and distinctly unique neighborhoods, each with their own vibe and character that define the multi-cultural spirit and value of LA.”
That said, there might be some concerns when it comes to supply in the market, he said.
“The LA market has reached its tipping point with respect to rooms demand saturation,” Brosh said. “As we see the continued delivery of additional pipeline that is already under construction or renovation over the next 12 to 24 months, we will see a notable slowdown in demand and corresponding new inventory production. You will also see a fair bit of rebranding and some repositioning of hotel brands happening during this time horizon as well.”
Reay said that many people in the industry have viewed supply growth in LA as the city simply catching up from a time when it didn’t add new rooms due to the recession. Although existing hotel owners might be concerned with supply booms, Reay said average daily rate and occupancy have actually increased because the new rooms are helping to attract conventions that previously wouldn’t have happened due to the lack of supply.
As of July, occupancy in LA’s central business district increased 2.5% to 86.4%, according to STR. ADR was up 3.4% to $206.35, while revenue per available room increased 6% to $178.28.
“On the flip side, if we get a slowdown in the economy when we’re adding thousands of more rooms, that could have an impact,” Reay said. “As long as the economy continues at a robust pace, we can absorb that supply. But developers could start looking more cautiously, and financing may be harder to find in the future.”