LOS ANGELES-The horizon looks bright for the Los Angeles hotel market during the second half of the year. While hotel transaction levels in L.A. were quiet during the first half, this is expected to change given that the market ranked as the most hotly contested market in Jones Lang LaSalle‘s recent national hotel investment survey.
The city exhibited the highest ratio of buyers to sellers among the markets surveyed, and investor expectations for hotel performance in L.A. are among the highest in the Americas, with a positive net balance sentiment of 65.1% for the short term and 75% during the medium term for the city, JLL reports. As such, the investor outlook for L.A. is the highest among the West Coast cities surveyed, with the exception of San Francisco. The medium-term outlook marks a higher premium than in the Americas on average, suggesting that investors feel that L.A. still has significant hotel performance upside.
“There was a plethora of activity last year and leading up into the fourth quarter, there was hesitation in the market regarding the fiscal cliff,” John Strauss, managing director with JLL’s hotels and hospitality group, tells GlobeSt.com. “Everything going on in Washington caused a pause to fourth-quarter transactions nationally and in L.A. That’s one of the reasons why first quarter into second was slow—there was a rush to finish transactions into the fourth quarter, and then there was a lull.”
Strauss adds that there were quite a few hotel trades in 2011 and 2012, so the market was taking a breather in the first half of this year. In addition, as supply-and-demand fundaments improved, many investors decided to wait it out to see what would happen before deciding to take their assets to market. Also, many Beverly Hills luxury hotels that had been stable for years simply don’t trade at all. And lastly, many owners want to take advantage of the favorable debt markets and hold onto properties longer in an environment in which there has been such a willingness on the part of conduit and balance-sheet lenders to lend again.
“We are likely to see sizable trades in the second half in the luxury and upper-upscale markets and in notable submarkets within L.A. County, such as the Sunset Strip corridor and the South Bay area of the county,” says Strauss.
The fundamentals do look good for hotel trades in the second half. Expectations for leveraged IRRs in L.A. have held steady at 17.2% over the past six months, a full percentage point below the Americas average given investors’ positive view of the market. Surveyed cap rates for the market average 7.5%, slightly below previous survey periods for the city, and investors expect cap rates in the market to decrease during the next six months as hotel profits increase and more high-quality assets come to market.
Also, the high number of buyers to sellers is poised to push up asset values and result in more transactions. Some 70% of respondents in JLL’s survey who are active in the market are pursuing acquisition opportunities, with private-equity investors, owner-operators and REITs at the forefront, in addition to offshore investors.
“Los Angeles is a gateway market that attracts a depth of investor profiles and makes this a strong liquid investment market,” says Strauss. In addition to the investor profiles mentioned above, many high-net-worth individuals reside in Southern California and have shown interest in investing in hotels.
Recent transactions in this market attest to the growing momentum of hotel trades. Pebblebrook Hotel Trust recently purchased the luxury, 57-room, all-suite Redbury Hotel in Hollywood from CIM Group for $34 million and plans to capitalize on its upside potential, utilizing the in-place management team of sbe Hotel Group. According to Pebblebrook, during the next 12 months, it forecasts that the hotel will generate EBITDA of $2.75 million to $3 million.
Also, Ashford Trust has entered into an agreement to convert the 258-room Crowne Plaza Beverly Hills to a Marriott Hotel after the expiration of the existing Crowne Plaza license agreement in March of 2015. The conversion includes an extensive product improvement plan estimated at $25 million, which will include an upgrade of the HVAC system and an extensive renovation of the guestrooms and public areas, including a transformational lobby renovation and exterior improvements. The Marriott Beverly Hills will continue to be managed by Remington Lodging & Hospitality following completion of the conversion.
As GlobeSt.com reported in April, Pebblebrook netted a total of $97 million from a preferred-equity offering of 400,000 series C shares, which followed public offering of 3.6 million series C shares in March. The 4 million shares were sold at $25 per share. The REIT will use the proceeds for general corporate purposes, including possible acquisitions and investments