Hotel Development Grows Despite Economy

Along with the increase in the number of rooms that are opening, the number of rooms under construction in the state is rising too. It climbed more than 14% overall in the state to 14,070 rooms for the first half of this year, with that statewide figure representing an increase of 26% to 9,971 rooms in Southern California and a decrease of 7% to 4,098 rooms in Northern California.

One of the most dramatic jumps in rooms under construction is in Los Angeles County, where the number has leaped 241% to a total of 4,558 rooms in 25 hotels in the first half of this year. That compared with 13 hotels totaling 1,336 rooms under construction in the first half of 2007. One reason for the new construction in L.A. is that Los Angeles is one of the strongest hotel markets in the country, according to Alan Reay, president of Atlas.

The new openings in Los Angeles County for the first six months of the year included the 100‐room Hampton Inn & Suites in Burbank, the 94‐room Holiday Inn Express in Hollywood and the 36‐room Palihouse Holloway in West Hollywood. In Orange County, two new hotels have opened: the 174‐room Renaissance ClubSport Aliso Viejo and the 110‐room Hampton Inn & Suites in Seal Beach, compared to no new hotel openings in the first half of 2007.

San Diego County reflected the same trend in new hotel openings, with 675 rooms opening in the first half versus 99 rooms for the first half last year. But the county bucked the trend on construction in progress, with a 29% decrease in the first half of the year. Rooms under construction totaled 2,155 in six properties, compared with eight properties totaling 3,045 rooms for the same period last year. Nonetheless, San Diego County continues to have the largest hotel under construction in California with the 1,200‐room Hilton San Diego Convention Center.

Reay tells GlobeSt.com that the slowing of construction in San Diego County reflects a cooling after several years in which the San Diego market was "very, very hot." Developers and lenders in San Diego are pulling back and taking a breather for the time being, Reay comments.

In addition to opening more rooms and having more under construction, developers have more hotel rooms in planning this year. On a statewide basis, the number of rooms in planning increased to 73,655 in the first half of this year, versus 64,908 for the same period last year.

Reay tells GlobeSt.com that the increases in new hotel openings, construction and rooms in planning reflect the fact that developers have been able to secure bank financing for new hotel construction despite the credit crunch. That's because the source of many if not most hotel construction loans is commercial banks, which have continued to provide construction loans despite the troubles in the capital markets.

But once the hotels are built, the developers need to secure permanent takeout financing to replace their construction loans, and Reay says that some troubles may be surfacing in that area. "We're now starting to see some problems where developers are having a hard time finding takeout financing," he says. He cites the recent foreclosure on the 221-unit Sheraton hotel and condominium project in Stockton, CA. Conduit loans via the CMBS market were once a prime source of takeout financing for hotel developers, but that source has disappeared with the collapse of the CMBS lending market.

The Atlas report notes that the "complete collapse of the subprime mortgage market and its huge impact on residential developers" is expected to affect hotel development. "We are going to see a greater supply of affordable land as lenders off‐load their foreclosed inventory at huge discounts," the report says. "This will make a lot of sites more appealing and affordable to hotel developers, especially in urban markets where they were competing with condo developers," who have now, pretty much, disappeared from the market.