West Coast hotel developers face rising barriers to entry

A rendering of the Hyatt Centric Mountain View in Mountain View, Calif., which is being built by OTO Development for a spring 2019 opening. Photo credit: OTO Development (Rising development costs and increasingly steep barriers to entry remain a hallmark of the West Coast hotel development landscape, but experts see plenty room to cut a few more deals.)

Rising costs and increasingly steep barriers to entry may characterize the West Coast hotel-development landscape, but industry players still see room to cut deals—although it may take some time.

Steve Daley, VP of construction and design for hotel developer and manager OTO Development, said much of the industry is still heavily focused on coastal expansion, with developers struggling to find opportunities in key markets.

"We're finding deals to be very hard to make on the West Coast," Daley said. "Rising construction and rent costs are an issue. It's a double whammy when trying to underwrite projects there, but we are very active in looking. We are very interested in activity in the [San Francisco's] Bay Area and the [Los Angeles] area, so we're not giving up. But it has been difficult to locate the deals."

Daley said the struggles of the West Coast are similar to those of the East Coast, and they are rooted in construction costs. According to Daley, construction costs in the Bay Area have seen an annual increase of 18 percent over a five- to six-year average, which can be a difficult metric to develop against.

The Fig is a mixed-use development under construction in Los Angeles, expected to open in late-2022. Photo credit: Ventus Group.

If You Build It...

In seeking a property that signifies the struggle to build in Los Angeles, look no further than The Fig, a mixed-use development near the University of Southern California. Scott Gale, president of Ventus Group, has spent the past four years slowly moving the needle on The Fig, which will consist of 298 hotel rooms, 222 student housing units, 186 multifamily residential units and more than 70,000 square feet of commercial retail, dining and office space spread across 4.4 acres of land.

The project is extensive, but Gale said it has taken nearly all this time to assemble the land for the deal and secure a developer. The property, which is located across the street from the Banc of California Soccer Stadium at 39th and Figueroa Avenue is expected to open in late-2022.

"This type of project would be much harder to do today," Gale said. "This is a complicated project in a complicated city with dynamic market circumstances. There has been a lot of things to consider on the way."

What Gale is hoping will aid The Fig's success in such a competitive market is its combination of 160 select-service and 138 extended-stay rooms, in addition to its mixed-use layout.

Ventus Group has yet to decide on a brand for The Fig, but on its development journey Gale said his company was able to obtain a motion from the Los Angeles City Council to examine a transient occupancy tax rebate program to assist with the development, alleviating some of the hotel's development costs. However, due to the nature of California's labor laws, Gale anticipates his hotel will be unionized, which is another cost developers must consider when taking on a hotel project.

Los Angeles continues to be a difficult market to develop in, which is why it took Scott Gale and the Ventus Group four years to secure the land for construction. Photo credit: Ventus Group

Tipping Point

Gale is bullish about the Southern California hotel market, however, and espoused an ongoing interest in the area. Despite this, he said it's true deals may take some time to formulate in the region.

So, is there capital brewing beneath the surface of the West Coast hotel scene, threatening to break free the moment development costs retract? Cameron Lamming, president and COO of San Diego-based RAR Hospitality, is anticipating as much in 2019.

"Construction costs are out of hand right now. There are no major shifts in the West Coast hotel market due to costs. Similarly, developers are not pushing super hard on timelines right now," Lamming said. "I think we will see slowdown in cost increases in 2019 and we're seeing a little bit of the start of that now."

Lamming is a proponent of introducing more independent and soft-branded properties to bloated West Coast markets that have an overabundance of major brands. This sort of development, he said, is the future of the region.

"It's massively difficult to find money for independent hotel developments right now because without a brand backing you, you are essentially jumping off a cliff," Lamming said. "There are very few places it works. But coming out with a new brand every two weeks and flooding a market with similar brands might not be preferable to creating your own entity and experience."