Burbank Residence Inn

IRVINE, CA-Hotel construction took off in California in 2007 despite the turmoil in the credit markets and concerns about a changing economy, according to a new report from Atlas Hospitality Group. Alan X. Reay, president of the Irvine-based consulting and brokerage firm, tells GlobeSt.com that the industry expansion—a 24% year-to-year increase in the quantity of hotel rooms under construction and a 74% increase in the number of rooms opened—is maintaining its momentum thus far this year.

The Atlas study compares the number of rooms under construction and opened in 2006 versus the construction and new opening figures for 2007. It shows that the number of hotel rooms under construction climbed to 16,495 versus 13,341, and the number of rooms opened i n 2007 soared to 5,668 in 2007, compared with 3,265 in 2006.

“What's driving the new construction is, purely and simply, economics,” Reay tells GlobeSt.com. He says that prices for existing hotels have reached the level that developers would rather build than buy. “It's making more sense to buy land and build today than it is to buy product that is 20 to 30 years old for $100,000-plus per room,” Reay explains.

The largest percentage of the hotels are being built where land is easiest to find, such as outlying areas like the Inland Empire of Riverside and San Bernardino counties, but developers are also completing infill projects in a number of cities. In Burbank, for example, R.D. Olson Development of Irvine opened the doors to its $37-million, 166-suite Burbank Marriott Residence Inn during 2007.

The turmoil in the capital markets hasn't slowed construction because financing is available to build hotels and those who are building and financing them see a bright long-range future for the hotel industry in California, according to Reay. “Despite all of the talk about recession, everyone that we've spoken to who has the capacity to develop is gearing up to do a lot more,” Reay says. He explains that financing is readily available because the funding for hotel construction generally comes from local banks that offer construction loans tied to prime—which has been decreasing lately. CMBS lenders don't lend on new construction anyway, so the problems in the CMBS market don't directly affect the hotel developers who are looking for construction financing, Reay points out.

Lenders are willing to finance construction because the California hotel market continues to perform well. “In 21 of 25 markets that we track in California, every one of them showed increased RevPAR last year, and of the four that were down, the most any of them was down was 2%,” Reay notes. He adds that hotel developers have benefited from the slowing in the residential market because labor and materials costs have dropped as a result of the near-hiatus in residential building.

Another change that the Atlas survey reveals is that the number of hotel rooms actually being built is inching closer to the number that are planned. Far more rooms are typically planned than ever get built, Reay explains. He says the number that actually reach construction is typically about 10% of the total planned. But now that percentage is closer to 20%.

“We expect to start to see a more consistent pattern showing that the number of rooms under construction is closer to the number planned. There will always be a big gap, but that gap is closing,” Reay says.