SoCal Hospitality Market Overview
The hospitality sector is showing positive growth as it quickly recovers from the slowdown caused by the pandemic. Revenue per available room (RevPAR) is performing well as inflation pushes rates higher. Individuals are eager to travel after periods of lockdown restrictions, increasing demand, especially in warmer regions like Southern California. The climate, tourism attractions, beaches, and numerous company-hosted events continue to pull many to the area. Hotel investments in SoCal flourished throughout 2022, and continued construction throughout the region will meet the growing demand.
Southern California’s hospitality sector is performing exceptionally well in the Inland Empire, Orange County, San Diego, and Los Angeles. The influx in the number of hotel rooms under construction and the high volume of hotels traded is peaking investor interest, as the market hasn’t seen a substantial slowdown in the past 24 months.
- Los Angeles has one of the highest number of hotel rooms under construction in the U.S. and by far the most in the state, with approximately 3,200 rooms across 22 hotels under construction.
- Improved hotel performance in Huntington Beach and Dana Point continues to be boosted by attractions such as Disneyland.
- There are 2,600 rooms currently underway in the Inland Empire.
- San Diego hotel sales volume exceeded a billion dollars for the second year in a row.
Los Angeles Performance| Construction | Sales
In the past year, Los Angeles has reported one of the highest hotel occupancy rates in the western United States. Hotel sales volume reached $1.5 billion in 2022, with three hotels trading at prices above $100 million. Leisure visitors drive the region’s hospitality sector, in addition to other travel segments, including corporate, group, and international visitors. Los Angeles has seen weekend occupancy near or above 80 percent since February 2022; however, the average 12-month occupancy is at 71.3 percent. Increased construction is driving increased vacancy rates, with levels not anticipated to moderate until 2025. There are currently 3,200 rooms under construction across 22 hotels. 2022 saw delays in hotel openings, with only 1,400 rooms opening out of the 2,200 anticipated. Therefore, Los Angeles will boast one of the largest markets in the country in terms of room count, as inventory is set to grow by approximately six percent in the next three years. Current players investing in LA hotels have resumed to pre-pandemic activity, including institutional and private buyers, developers, and investment managers. During COVID-19, governments were the primary buyer of hotels to address homelessness or affordable housing. A new transfer tax on residential and commercial real property, the “Mansion Tax”, will go into effect in April 2023, impacting hotel values. The “Mansion Tax” is a new “Homelessness and Housing Solutions Tax,” stating that if the sale amount exceeds $10 million, it will be subject to an additional tax rate of 5.5 percent. The new tax law, coupled with increased interest rates, will undoubtedly impact investment activity in the market.
Inland Empire Performance | Construction | Sales
The Inland Empire contains 53,000 hotel rooms across 706 properties, with most properties containing about 74 rooms, well-below the national average of 90 rooms. The market offers a diverse price range of hotels, attracting a wide range of consumers. The Inland Empire is one of only 10 U.S. markets that has both an above-average proportion of economy and midscale units, and also an above-average proportion of luxury rooms. The average daily rate (ADR) is $154.04 with 12-month average RevPAR at $102.23. In 2022, occupancy was a step above the national average, landing at 66.4 percent. There are 2,600 rooms in the pipeline across 26 properties, keeping in pace with the robust increase in inventory over the past three years, which saw 33 projects delivered containing 3,300 rooms. Investment activity has remained strong with 56 hotels trading.
Orange County Performance | Construction | Sales
Hotel occupancy in Orange County is behind pre-pandemic levels; however, is above the national average, sitting at a 12-month average of 71.4 percent. Lower occupancy rates can be attributed to the increasing construction and development in the past two years. Currently, there are 1,100 rooms in the pipeline expected to open by 2025, which will increase overall inventory by 1.9 percent. The average daily rate has grown by 23.3 percent in the past year, and in November 2022 reached $198 which is approximately $40 higher than November 2019 levels. Rent growth is anticipated to continue over the next five years, but at a moderate pace. Demand for O.C. rooms are is till high despite rising rates, as the region is a hot-spot for tourism, leisure travel, and business. An increase in business travel demand was generated by tech, financial, BioMed, and medical supply companies implementing large group visiting over the last few quarters. Overall, quantity of hotels traded is in line with historical averages, and at high volume, as three hotels traded with price tags exceeding $100 million, including the Montage Laguna Beach, which traded for $2.5million per key, the highest price-per-key in market history and one of the highest nationally.
San Diego Performance | Construction | Sales
San Diego is one of SoCal’s top performing hospitality markets, returning to pre-pandemic levels in the summer of 2021. San Diego is the only major California market showing consecutive months of full RevPar recovery. In the past year, RevPAR and ADR exceeded 2019 numbers, with the average daily rate at $202.28 and RevPAR at $146.87. Most of San Diego’s recovery can be attributed to an influx of business travel, including conventions, conferences, and other corporate travel. As of November 2022, weekend occupancy has been at 82 percent, reflecting the large quantity of leisure travel to San Diego. High ADR and improved demand resulted in San Diego’s RevPAR growing 51.9 percent in 2022, making San Diego one of the fastest markets to recover in the western U.S. However, the market is struggling to deliver large quantities of supply due to high costs and strict regulations. In the future, deliveries are anticipated to increase, with three hotels consisting of a total of 1,926 room opening by 2025. If the construction is completed within the predicted timeframe, San Diego will experience the largest influx of hotel rooms in the past two decades.