Hotel Buyers Have No Reservations About Suburbs

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Hotel Buyers Have No Reservations About Suburbs
Room Service: James Stockdale at a Cerritos Sheraton hotel that JLL has listed.

Priced out of the region’s hottest hotel zones, investors have turned their attention to secondary markets, generating a rate of churn in outlying locales unseen in years.

As institutional buyers pay top dollar to snap up trophy properties in downtown Los Angeles and blue-chip coastal markets such as Malibu and Santa Monica, two classes of smaller shoppers have turned their attention to those outlying markets with strong fundamentals.

Regional investors, owner-operators, high-net-worth individuals and foreign players have dominated this most recent round of sales, said James Stockdale, a senior vice president on the hotels and hospitality team at Jones Lang LaSalle Inc.’s downtown L.A. office.

“While city center properties are in vogue, more suburban assets are attracting big pricing, starting at about $15 million, as investors look outside of traditional investment pockets,” said Stockdale, who has the listing on the Sheraton Hotel in Cerritos.

A dozen hotels outside the downtown core and beach cities have traded above $15 million since the start of last year, compared with just eight in the five years prior, according to data from JLL.

Part of the draw is that suburban properties are cheaper. Since the start of 2014, suburban hotels traded at an average of $210,000 a room, compared with $310,000 a room for urban core properties.

“Some buyers, like regional investors, can’t handle the cap rates being so low in city centers, so they are looking strategically to suburban markets to expand their horizons,” said Bruce Baltin of downtown hospitality consulting firm PKF Consulting USA. Higher prices can result in lower capitalization rates, which mean a lower return on the investment.

And prices in prime markets are on the rise.

The Ace Hotel downtown was sold for $103 million, a whopping $566,000 a room, in April to Chesapeake Lodging Trust, an Annapolis, Md., real estate investment trust. A month earlier, the 47-room Malibu Beach Inn sold for $80 million, or almost $1.7 million a room, the highest per-room price for a hotel outside of Florida, New York or Hawaii. The luxury SLS Beverly Hills hotel, developed by hotel and nightclub mogul Sam Nazarian, went for $195 million, or $657,000 a room, in May.

Scouting opportunity

Coupled with that pricing pressure, opportunistic buyers are drawn by the vibrancy of certain submarkets.

“Investors from China are looking for assets in secondary cities such as Portland, Ore.; Austin, Texas; and Atlanta as opposed to Manhattan, Los Angeles and San Francisco,” said Gregory Karns, a partner at Century City firm Cox Castle & Nicholson who manages the firm’s Pacific Rim group. “That includes venturing into the more suburban areas of bigger cities such as Torrance.”

Recent examples include China’s Sichuan Xinglida Group Enterprises Co.’s purchase of the Marriott Torrance in late 2013 for $74 million, or $152,000 a room.

Bob Amano, executive director of the Hotel Association of Los Angeles, said trends in tourism are driving trends in investment. Chinese tourists in Los Angeles often choose suburban hotels in places with large Chinese populations, such as San Gabriel, rather than staying in downtown or other city centers.

Regional buyers are also coming to the table. Meile Investment, an Asian-American firm in Monrovia, bought the DoubleTree Monrovia last year for $43 million, or $251,000 a room. Santa Ana’s Khanna Enterprises, which owns and operates five hotels in the state, bought the 280-room Sheraton Agoura Hills in March for $44 million, or $158,000 a room.

Charles Yao of Arcadia’s Aberdeen Realty Corp. represented Khanna, run by brothers Ravi and Rajesh Khanna. He said they wanted to be in a middle-class suburb that captured the overflow of corporate clients working in surrounding areas.

“They are an owner and operator, so a major consideration is whether the franchiser will let them run the hotel themselves, which seems to be more of an option in the suburbs,” Yao said.

In addition to lower prices, access to city centers and proximity to freeways, Amano cited the economic benefits of being outside of the city of Los Angeles, including lower occupancy taxes and the ability to avoid the city’s minimum wage, set to increase to $15 an hour under a recent ordinance.

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