In the largest hotel transaction in the LAX area since 9/11, the Sheraton Gateway Hotel LAX is under contract to be sold for nearly $82 million, according to sources close to the deal.

What's more, several large nearby hotels comprising more than half the rooms near the airport could soon follow, according to additional sources.

Kor Hotel Group Inc., a subsidiary of The Kor Group Inc., is selling the 802-room property the fifth largest hotel by number of rooms in L.A. County for nearly double what the firm paid three years ago.

While the roughly $100,000 per room price is low by L.A. County standards, it marks a high-water point for the hotel submarket surrounding Los Angeles International Airport.

"They're attracting institutional demand, where they weren't before," said Bruce Baltin, a senior vice president at hotel tracking firm PKF Consulting. "They are attracting a sophisticated buyer who has previously steered clear of that market."

The Sheraton Gateway deal, in which the buyer was not disclosed, comes on the heels of Starwood Hotels & Resorts Worldwide Inc.'s sale of the 740-room Westin Los Angeles Airport to Host Marriott Inc. as part of a national portfolio transaction.

The two trades and the high prices that the properties fetched haven't been lost on other LAX hotel owners, one of whom has decided to put its hotel on the market while another is said to be seriously considering a sale.

Cumulatively, the four properties that either traded hands or have been listed for possible sale contain 2,686 rooms, or 57 percent of the hotel rooms along Century Boulevard between the San Diego (405) Freeway and the airport's entrance, according to PKF Consulting.

The sales activity is partly due to a resurgence in business at the hotels, which were some of the worst affected by the fallout from the Sept. 11, 2001 terrorist attacks. At their lowest point, the hotels were half empty and rates already some of the lowest in the county dropped to $70 a night. The prevailing rate at the time was $110.

During the last two years, occupancy at Century Boulevard hotels jumped nearly 16 percent to finish last year with an average 83 percent of the rooms rented on a nightly basis one of the highest rates in L.A. County.

"The market has fully rebounded," said Alan Reay, president of Irvine-based hotel consultancy and brokerage firm Atlas Hospitality Group Inc. "It's a very strong market now and owners are starting to capitalize on it."

Already two hotel owners are testing the market and have begun marketing their properties. A partnership of the Dutch bank ING Groep NV and Tishman Properties Inc. has put its 564-room Four Points Sheraton LAX on the market. The partnership hired brokerage firm Eastdil Secured to market the hotel, which could fetch close to $60 million.

Pacifica Cos. Group Inc., the owner of the 580-room Radisson Hotel Los Angeles Airport, the closest hotel to the LAX runways, put the property on the market early last year.

Weighing sale
Two years ago the City of Los Angeles gave the Radisson owner permission to expand the hotel and construct a 10-story parking garage construction hasn't begun on either project. The Radisson makes significant revenue from renting long-term parking for travelers using the airport.

Hyatt Corp. took a close look at buying the Radisson, but decided renovating the hotel to the Chicago company's standards was prohibitively expensive, according to several sources close to the deal.

With no prospective buyers willing to pay the asking price, Valencia-based Pacifica took the property off the market and refinanced the hotel. Still, sources said the owners are willing to part with the Radisson.

It's unclear how hungry hotel investors will be to own LAX properties, especially since nightly room rates have stayed relatively low. With LAX passenger volumes back near the levels before the terrorist attacks and vacancy declining at nearby office towers, the hotels surrounding the airport still haven't been able to charge the pre-9/11 rates.

At the end of 2005, average room rates at Century Boulevard hotels had risen to about $90 a night a healthy increase from the bottom of the market but still a discount to the L.A. County average of $128.

With the largest concentration of hotels surrounding any airport in the state, the LAX market has always had difficulty raising rates because competition has been fierce. That's been a welcome development for travelers but a trait that has kept property prices low.

Airport hotels also face a problem raising rates because many properties have signed contracts with airlines that give steep discounts to flight crews. Typically, because of the volume of business an airline contract brings, the rooms are priced between $40 and $70 a night.

Recently, some of the larger hotels have been able to wean themselves off airline contracts and attract a mix of travelers to their properties, Baltin said. Without the burden of those contracts, he believes rates will continue rising.

"The constant problem at LAX is that there are so many rooms that you have to get a tremendous lift in the market to get even a small rate increase," Baltin said. "It's a challenge to get rates up there."

Many of those owners, like The Kor Group, snapped-up the hotels when prices were depressed after the market fallout from the September 11 attacks.
Instead of idly sitting on the properties, Kor which owns the Viceroy hotel brand and other owners have begun investing millions of dollars into renovations.

Updated rooms
The 1,234-room Hilton Los Angeles Airport recently underwent an extensive renovation, as did the 441-room Renaissance Montura Hotel Los Angeles, Baltin said.

After buying the Sheraton Gateway for $44 million nearly three years ago, The Kor Group sunk another $14 million into fixing up the hotel's guest rooms, common areas and the property's poolside cabana and bar.

Beyond the chance of buying a recently renovated property, hotel investors like the LAX market because even though there are many competing rooms nearby, there won't be more built in the near future due to a lack of land and the high cost of construction.

Hotel investors have also been attracted to the LAX area because they can buy properties for close to $100,000 a room, while elsewhere on L.A.'s Westside, hotels are fetching close to $300,000 per room.

"You can't buy anything in L.A. at these prices, so there's really no way to lose," said Art Buser, an executive vice president at the brokerage Jones Lang LaSalle Hotels. "Rates are already on the rise, and they're only going to continue to go up from here."

*This story will be available in the Jan. 30 edition of the Business Journal.

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