Two events last week underscored the sudden strength of the hotel market.

One was Wednesday’s announcement by Hilton Hotels Corp. that its fourth quarter earnings nearly doubled. The other was the sale of the Universal Sheraton to Lowe Enterprises Inc. for about 70 percent more than the owner paid for it only four years ago.

The Beverly Hills-based Hilton’s fourth quarter net income leapt to $207 million, from $105 million in the year-earlier period. Revenue also doubled during the period, to $2.3 billion from $1.08 billion in 2005. The full-year revenue figure also nearly doubled in 2006.

Much of Hilton’s results are predicated on its acquisition of Hilton International assets last year, but some of it is based on an industry that’s booming.

Meanwhile, Lowe Enterprises’ hotel and resort development last week agreed to purchase the Sheraton Universal for $122 million $50 million more than the affiliates of Walton Street Capital and SCS Advisors paid for the property in 2003. Lowe will also do a $20 million renovation to the property.

The company also expects to break ground on its Terranea Resort in Rancho Palos Verdes any day. The $440 million, 360-room hotel will also have 100 hotel condos, all of which are either oceanfront or have an ocean view.

Hotels are enjoying good times because the overall economy is doing well, creating demand; at the same time that supply has been constrained by a lack of hotel construction recently, partly because of high construction costs.

“Rates are up substantially in average daily rate and occupancy, so the hotel industry especially in the L.A. market is enjoying one of its most profitable times ever,” said Alan X. Reay, president of Atlas Hospitality Group. “You have a combination of strong revenue, strong profits and a very favorable financing market, so it’s almost a triple shot to the market.”

Projects announced

Michael Collins, executive vice president of LA Inc., said that the average daily room rate jumped 10 percent in 2006 to $132. Revenue per available room climbed nearly 12 percent to $115. As a result, several luxury hotel developers have announced projects recently, despite high construction costs.

The Beverly Hilton Hotel announced plans for a Waldorf-Astoria Beverly Hills last month. Marriott International Inc. has plans for a Ritz Carlton above its existing hotel at the convention center. As part of the Grand Avenue project, Related LP is building a Frank Gehry-designed hotel with Mandarin Oriental International Ltd. The W Hollywood Hotel is breaking ground next week, and there are plans for a Montage Hotel in Beverly Hills.

Collins wonders if the new construction will be enough to meet demand. “We’re catching up, but we ain’t there.”

Reay said not to expect empty rooms, or lower prices, to result from the round of construction.

“There’s been such a shortage of new hotels that there’s no question that the new supply could easily be absorbed,” Reay said.

Rob Lowe, president of Lowe Destination Development, agreed.

“It may seem like there’s a lot of development, but in the grand scheme of this market, there are not very many.” He attributed the hotel market’s strength simply to the voracious demand that has far outstripped supply.

Downtown benefits

Downtown stands to benefit from the building binge, with a 124-room Ritz-Carlton Marriott and the 275-room Mandarin hotel going in.

“Downtown is kind of a brand new market,” Collins said. “It was in suspended animation. But when a bunch of smart people start investing their dollars in a whole bunch of places, it built a critical mass.”

Collins said LA Inc. booked seven conventions in 2005, 21 in 2006 and 30 have already been booked for 2007. He believes the speed at which the Mandarin is moving along underscores the area’s resurgence.

“It took years for the (Ritz) project to go from proposal to funded reality, and from my perspective, the Grand Avenue project is moving along really quickly.”

While the luxury hotel market is going great guns, the economy market is struggling. Reay noted that today’s steep construction costs mean that each room costs $120,000 to $140,000 to build.

Given that, and the knowledge that a hotel must charge upwards of $140 per night to recoup the investment, there’s not much incentive to build hotels that rent for $50 to $60 per night.