New Hotel Construction is Booming in L.A.

Los Angeles is seeing a surge of hotel construction. The market has more hotel projects in the construction pipeline than any other market in the US. The market’s strong economy, job growth, international travel and corporate expansion are helping to drive the activity. In addition, the market is relatively undersupplied for hotel rooms. As a result, the market is leading the nation in hotel construction.

“There is not just one factor that is influencing the strong hospitality construction pipeline in LA. From strong local job growth, significant corporate expansion/relocation, yield hungry international investors, specifically in Europe, China and Japan, to lenders easing underwriting standards have all fueled the robust hotel development pipeline in Los Angeles,” Malcolm Davies, principal and managing director at George Smith Partners, tells GlobeSt.com. “During the 2007-08 recession, development came to a screeching halt and it’s taken the last 10-12 years for hotel development to catch up.”

Davies is an expert in hotel financing—recently securing $460 million non-recourse senior construction financing for the ground-up development of a 35-story mixed-use high-rise that will be anchored by a Ritz Carlton Hotel in Portland. Lenders are showing general caution for hotel construction. “It’s not just about the location or the flag, but also about who is operating the hotel and what the greater macro economy is doing,” he says. “Figuring out whether or not there is a supply glut (or will be in the near future) in the specific market is also important—the market needs to be able to quickly absorb the new supply.”

In addition, the active development market has given lenders pause. “Lenders are also very focused on the oncoming supply of other hotels in the market as increased competition can slow down the ramp up of the property,” says Davies. “There is much more scrutiny put on deals targeting the top of the market, meaning high-end full service, versus middle of the road, meaning select/limited service.”

This year, Davies expects more of the same in terms of construction lending activity and new development starts, describing the market sentiment as “cautious optimism.” That is true both here in Los Angeles and nationally. “The national hotel development pipeline is full of new project in various stages,” says Davies. “Hotel development will continue across the spectrum of hotels—limited/select/luxury—with a focus on underserved markets, like Salt Lake City and Scottsdale. There will be a rise in mixed-use projects with a significant hotel component. Banks will continue to be selective and only work with the best developers.”