IRVINE, CA—West Coast hotel activity is strong, both in trades and construction. As GlobeSt.com reported last week, Pacific Hospitality Group and R.D. Olson Development have released plans for an eight-story, 250-room hotel facing the ocean that will be part of the Pacific City development in Huntington Beach. GlobeSt.com sat down with Bob Olson, founder and CEO of R.D. Olson, to discuss the reasons behind the hotel boom and how the sector looks going forward.
GlobeSt.com: To what do you attribute the recent ramping up of high-priced trades in the West Coast hotel market recently?
Bob Olson: It’s performance related. Hotel performance in most coastal markets is back to 2007 levels. When compared to other real estate investment, hotels offer a better return on investment, especially when compared to multifamily. However, there are pockets up and down the state of California—pretty much inland—that have not recovered. From the Inland Empire to Modesto, Fresno and Stockton—those markets are still suffering. It’s the haves and the have nots. The coastal markets have come back pretty robustly, driven largely by the economy turning around. People are traveling more and are tired of being in a recession. The leisure traveler feels they owe themselves time away. Business travelers feel it’s time to get in front of their customers. There’s only so much that electronic media can do.
GlobeSt.com What’s the outlook on this sector’s performance for 2014, both locally and nationally?
Olson: We think the hotel market will perform well for 2014. In the markets we are targeting, RevPAR increases are projected to increase significantly, as they have over the past few years. We are personally projecting a 6% to 7% RevPAR increase, and some markets will do better. We’re already seeing in our hotels for first-quarter 2014 a 10% RevPAR increase, and we fully expect to see 8% year-over-year growth. But it could also end tomorrow with a black swan event. It’s not like office buildings, where leases run five to 10 years—our guests walk in and out daily. Our industry tends to lead the economy in terms of performance. When the economy starts picking up, we’re the first to see it.
GlobeSt.com: Hotel development also seems to be rising. What does this say about the market?
Olson: Lenders are just starting to recognize the improving performance of hotels. The pent-up demand for debt on new hotel development is significant—in some markets, frighteningly so. Our concern is that there’s going to be over-saturation. Select service is leading this recovery, but in many markets it’s going to be overbuilt. Full service is a sector to start to focus on for the development side, and it’s going to catch up.
GlobeSt.com: How much more new hotel development can West Coast markets expect in the near future?
Olson: Generally speaking, I think we will see a significant increase in the new hotel development here on the West Coast. However, for the markets that have high barriers to entry, we will see very little new development. New product always wins in markets where there’s old supply. What we’re seeing now is new hotels come in displacement of old product. It’s not as if there are giant new demand generators. There are not a lot of office buildings being built or a lot of leases being signed, and that’s where our business comes from. There’s not a lot of leisure being created other than the economy. Service hotels are being built now, and typically the first to feel it are the existing hotels.