Hot L.A. leads strong West Coast development pipeline

The U.S. hotel pipeline continues to maintain momentum and the West Coast is keeping up with the pace. 

Led by the Los Angeles/Long Beach market with 6,111 rooms under construction, there are currently 104,978 rooms under construction in the region, according to data from STR as of October 2019. The region comprises Alaska, Washington, Oregon, California and Hawaii.

Los Angeles is one of the top five pipelines in the United States by number of rooms. 

“Downtown L.A. has really risen as a place to be in development,” said Luigi Major, managing director, consulting & appraisal at HVS Los Angeles. “It is an area that has been somewhat neglected many years back, and it’s more difficult to locate the land that would make a project feasible.” 

“Limited 2019 completions aided Los Angeles occupancy levels, but a greatly expanding construction pipeline going forward may weigh on property fundamentals in the next 12 to 18 months,” said Skyler Cooper, national director of Marcus & Millichap’s hospitality division.

Making Strides

Meanwhile, the story of emerging growth points to the Pacific Northwest and smaller California markets. 

For example, Portland, Ore., and San Jose, Calif., have hotel room inventories projected to grow 8.3 percent and 7.6 percent, respectively, over the next few years, Cooper said. L.A.’s growth rate is 5.5 percent in the same data set. 

The Portland area continues to grow in big ways in business and leisure, said Brian Resendez, senior VP, hotels with SVN | Bluestone & Hockley, a real estate firm based in Portland. 

“Travel Oregon has done an incredible job marketing the state,” he said. “There’s a buzz about how great the Pacific Northwest is.”

Portland’s central-city inventory was projected to grow nearly 50 percent from 2016 to 2021, according to Travel Portland. 

“It’s partly interstate travelers, but also the population growth in Oregon is creating demand with staycations and families traveling to the coast,” Resendez said. “Demand is going to remain pretty steady.”

However, across the Portland area, revenue per available room has decreased in year-over-year comparisons ranging from drops of 5 percent to 15 percent. 

“When hotel developers start seeing that RevPAR growth wane, that’s concerning” Resendez said. 

In many California markets, barriers to entry control growth. 

“California is very well represented because there are so many markets and a large population, but it should have two or three more times the projects if you look at comparables,” Major said. 

Most local jurisdictions are very restrictive in terms of new development, which creates high barriers to entry, he said. 

“It’s not uncommon for a hotel project to take five to 10 years in California and the same project could take one to two years in markets in Texas, or even New York,” Major said. 

Conversely, a comparatively smaller construction pipeline is benefiting hotel property fundamentals in San Francisco, Cooper said. Average daily rate and RevPAR are growing faster than the U.S. average or the rates for any of the other top 25 markets.

“Fewer hotel rooms are under construction in the metro [area] than opened within the past 12 months, which bodes well for hotel performance in 2020,” he added. 

Cooper noted that San Francisco’s average trailing-12-month occupancy as of November was 81.9 percent (up 10 basis points year over year), ADR was $250.51 (up 4.7 percent year over year) and RevPAR was $205.24 (up 4.3 percent year over year). 

In November, the San Francisco/San Mateo market had the biggest increase in RevPAR (21.5 percent to $203.61), due to the only double-digit increase in ADR (14.2 percent to $259.80) and the highest rise in occupancy (6.3 percent to 78.4 percent), according to STR.

Seattle is another strong market for growth. 

“Seattle is growing at an alarming rate,” Resendez said. “That’s driven by tech, aerospace and general business demand.”

Construction Issues 

Cooper pointed to the shortage of construction workers and rising construction costs as primary challenges for development. 

“The construction sector had an unemployment rate of 4.4 percent in November, above the U.S. jobless rate of 3.5 percent, as developers and contractors seek to hire and retain talent,” he said. “Elevated construction activity for other product types, especially multifamily and self-storage, creates competition for both workers and materials.”

At the same time, construction demand is an important part of the development landscape. 

“If there’s a construction slowdown, that does help costs a bit; some see the trough as an opportunity to get in,” Major said. “Because it can take two to three years to build, those projects will be done when the market is on the upswing.”

Hotel developers are testing modular construction, where rooms are built at a separate manufacturing facility and assembled at the development site as a way to shorten timetables and reduce costs, Cooper said. 

Hilton opened the Home2 Suites by Hilton San Francisco Airport North, its first hotel built via modular construction, in June 2019. It took 16 months to complete. 

Due Diligence

In times of high growth, development requires careful demand consideration, Resendez said.

“A hotel can’t just rely on leisure. There has to be business demand there as well,” he said.

Resendez said in his experience in Oregon, projects that are based on single events located in fourth-tier or fifth-tier towns likely will have challenges. 

“The most sophisticated developers are going to look at where they are getting business from,” he added.

Major expressed a similar sentiment: “Given the pace of new supply growth, it is important for market participants, including hotel developers, lenders and consultants, to exercise caution and discipline when considering new projects.”