IRVINE, CA-A new report by Atlas Hospitality Group sees a strong California hotel market where construction of new rooms has accelerated this year, but uncertainty about finance clouds the forecast regarding future development. “If conditions hadn’t changed in the finance markets, I would be very confident in saying that we are going to have a lot more new hotel construction in ’08 and ’09 in California,” Atlas president Alan X. Reay tells GlobeSt.com.

The latest Atlas report on new hotel construction for the first half of this year shows that the number of new hotel rooms under construction and planned has climbed considerably throughout the state. Reay says that Atlas still anticipates an increase in the number of hotels under construction in 2008, but he adds, “we are also cautiously watching the fallout from the subprime lending market that is impacting commercial loans as well.”

Reay explains that over the last four or six weeks, with the meltdown in the CMBS markets that was caused by the subprime lending market, “there has been a ripple effect” in the hotel lending market. “We have deals where the lenders quoted us rates in the low 6% range and now the lender has either pulled out of the market completely or has retraded into the 7% or higher range,” he says.

At the same time, however, Reay points out that the economic fundamentals of the hotel market in general and California in particular are very strong. Hotel daily rates are increasing, occupancy is rising and RevPAR is trending upward.

All of this is creating the impetus for new hotel construction in California, but if the cost of borrowing rises too much, “it could put the brakes on new development,” the Atlas president says. He points out that another factor driving new construction is rising sales prices, which are now approaching or exceeding replacement costs.

With existing hotels selling in the range of $100,000 per room and with the cost of new construction at about $100,000 per room, investors are likely to choose building a new hotel versus buying an older property that may be outdated, Reay says. Reay observes that if new construction continues and the economy slows, “we could be on track for oversupply.

As it stands now, hotel developers in California appear to remain optimistic, with more rooms under way and more in planning than at this time last year. Two new hotels opened in the first six months in Los Angeles County, the 140-room Courtyard by Marriott in Santa Clarita and the 127-room Homewood Suites in Agoura Hills.

That’s two more hotels and 267 more rooms than had opened at this time last year in L.A. County, and the number of rooms under construction in the county rose 80% to 2,400. Developers have 9,121 rooms in the planning stage, an 18% increase from the 7,722 rooms in the first half of 2006.

The trend is reflected throughout California, with a 31% increase in the number of rooms under construction and a 34% increase in rooms planned in San Diego County. In Orange County, new construction was up 53% in the first half of this year, with 3,289 rooms in planning, up 37% from last year.

The Inland Empire bucked the statewide trend somewhat, with more rooms planned in both Riverside and San Bernardino counties, but both showed decreases in the number of rooms under construction versus last year. Northern California figures showed six hotels with a total of 442 rooms open in the first half of 2007, a 38% decrease from last year, but the number of rooms planned rose by 67%.

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