Hotel development in California slowed in 2024 and is likely to stay sluggish in 2025 as investors remain concerned about rising interest rates and the high cost of construction.

A new survey out from Newport Beach-based Atlas Hospitality Group reported that Los Angeles County had the highest number of new hotels that opened among California counties in 2024, with five. It also led in the number of new rooms that opened, with 607.

Still, that represents a 56% room count decrease from nine hotels and 1,370 rooms that debuted in 2023.

“There is not a lot of land, so it really comes down to buying existing buildings and repurposing them,” said Alan Reay, president of Atlas Hospitality. “That means that you’re also in competition with multifamily developers. Those other uses and the mansion tax has obviously also had a negative impact both on sales and the desirability for anyone to build new hotels in the city of Los Angeles.”

The mansion tax, also referred to as Measure ULA, is a transfer tax that applies to properties that sell for more than $5 million in the City of Los Angeles.

Despite the challenges, L.A. County still leads the state in terms of hotel developments, with 23 hotels equaling a total of 2,833 rooms under construction. That’s up from 18 hotels and 2,162 rooms under construction in 2023. The 300-room Kali Hotel, Autograph Collection, located in Inglewood, is the largest in progress and is estimated for completion in 2026.

Meanwhile, the 150-room Cambria Suites Burbank by Choice Hotels was the largest hotel to open in L.A. County last year.

“Because it’s a public company, (Choice Hotels) has more financial wherewithal and they’re committed to growing a brand,” said Gary Gray, chief investment officer at 24seven Hotels, the Irvine-based management company overseeing the Cambria Suites Burbank. “They are able to weather a lot of the challenges that we might talk about for the traditional developer that has to go out and put together a capital stack that will include debt and equity and all the other pieces.”

L.A. County currently has 199 projects with 27,457 rooms in planning, down from 225 hotels and 33,372 rooms in 2023.

Construction is up, but so are defaults

Per the Atlas report, in addition to the increased cost of construction and rise in interest rates, the industry is also seeing a number of hotels in default on their loans or in bankruptcy. The report predicted the future for hotel construction will remain weak in the near term as investors focus on purchasing existing hotels at discounts.

“There is a growing emphasis on repositioning and renovation renovating existing properties rather than ground up construction,” Kuby said. “Many hotels that were built in the early 2000s are undergoing modernization. … We’re seeing our developer partners today try to be much more strategic, focusing on adaptive reuse, renovations and projects that align with long term tourism trends rather than the short-term event-driven demand.”

Reay observed that high-end hotels were seeing more luck in getting financed than projects intended for budget travelers.

“The one area that is definitely being impacted is the budget to mid-price point.” Reay noted. “The reason for that is that the bulk of purchases are for alternative use. The cost of construction, whether or not you’re a higher-end hotel or a budget motel, is relatively the same in terms of the whole construction costs. The economics today of building a budget or a mid-priced hotel in Los Angeles, it just economically does not work.”

Looking selectively only

Britten Shuford, co-founder and managing partner at Santa Monica-based PRG Investment & Management Inc., said his firm is selectively looking at L.A. PRG renovated and reimagined the Prospect Hollywood, a luxury boutique hotel with 24 rooms, in March 2020 and then reopened it in July 2021.

“This environment is quite challenging,” Shuford said. “It’s hard to get an attractive loan today.”

Reay also acknowledged the challenge in borrowing money.

“The interest rates on loans have jumped where previously we were in the low to mid 4% range,” he said. A”nd now if you’re able to obtain it, construction financing is in the 8% to 10% range.”

“There’s an element of risk taking and reward for the developers that do well and time it right,” Gray added. “Development is difficult in California. It’s just very expensive and there are lots of barriers to entry. But by the same token, when you finish, hopefully the rewards are there. Rates are higher, the occupancies are stronger, and so you have a stronger bottom line.”

And for some in the hotel industry, Los Angeles’ commitment to major events serve as bright spots on the horizon.

“I think we’re seeing some slight optimism in the Los Angeles market right now,” said Alex Kuby, associate principal at Long Beach-based architecture firm DyeLot, which specializes in interior environments for hospitality. “I think Los Angeles experienced kind of a complex moment in hotel development… but you have major upcoming events like the 2026 FIFA World Cup and the 2028 Olympics that are fueling investment and demand.”