A rising number of smaller, modest hotels changed hands in the first half of this year in Los Angeles — a marked change from the same period last year when several large, luxury hotels in the county sold at premium prices.
Investors in luxury hotels and resorts are likely hanging on to such “trophy properties” because business is steady and revenue per room is rising.
“With revenues being high, there’s not a huge motivation to sell,” said Bruce Baltin, a managing director at CBRE Group Inc.’s hotel platform.
According to Atlas Hospitality Group, there were 22 hotels sold in L.A. between January and June of this year with deal volume totaling $180 million — an average of $8.2 million a sale. During the same period last year, hotel sales averaged $18.8 million apiece, with 14 deals in L.A. and dollar volume reaching $263 million.
The biggest deal during the first half of this year was the $44.5 million sale of Hyatt Place Los Angeles/LAX/El Segundo. A handful of other hotels sold for more than $10 million but no other sales were recorded above $15 million, according to Atlas.
This year’s sales of more modest Best Western International Inc., Quality Inn and Motel 6 properties in Los Angeles could indicate investors are now looking to acquire and upgrade smaller properties to take advantage of the strong market.
Alan Reay, president of Atlas Hospitality Group, said investors are finding that hotel investments are profitable right now while interest rates remain low. “We’re seeing a number of investors come into hotels from other product types, especially apartments,” he said.
China’s influence
Some of the large trophy property sales in recent years were driven by policy changes in China where regulators cracked down on capital outflow, including foreign investment in real estate.
As a result, Chinese companies were forced to sell trophy assets, and the hotel industry was hit hard. In 2017 alone, there was a 55% drop in Chinese investment in U.S. commercial real estate, according to a report from Cushman & Wakefield Inc.
For example, China’s Anbang Insurance Group Co. Ltd. purchased Strategic Hotels & Resorts for $6.5 billion in 2016. The portfolio included Loews Santa Monica Beach Hotel, the Montage Laguna Beach and the Ritz-Carlton, Laguna Niguel. Then in 2018, the China Insurance Regulatory Commission took over the company amid fraud allegations and has been selling off its assets.
Some of those sales are expected to close later this year.
Room for growth
Also coming up, Park Hotels & Resorts Inc. is acquiring Chesapeake Lodging Trust in a deal valued at roughly $2.7 billion, which analysts say they expect will drive up numbers during the second half of the year.
“We are going to see an increase in actual sales and an uptick in dollar volume that will surpass what we had in 2018,” Reay said. “The median price per room will end the year at the highest dollar volume ever seen.”
Still, many investors will likely hang on to properties because they’re getting strong returns, said James Stockdale of Jones Lang LaSalle Inc.
“The fundamentals in Southern California remain good despite all the new supply,” he said. “We have a lot of long-term holders.”
The sector’s strength also appears to be driving new hotel construction. In 2018, 11 new hotels opened in L.A. County, and 45 projects were under construction. By the end of 2019, Atlas estimates nearly 3,000 hotel rooms will be added to the market.
Hyatt Place Los Angeles/LAX/El Segundo
Rooms: 143
Buyer: Washington Holdings
Seller: Blackstone Group
Price: $44.5 million
Quality Inn & Suites Artesia – Cerritos
Rooms: 161
Buyer: Maya Inn & Suites Inc.
Seller: Hosanna Properties Inc.
Price: $13.8 million
Quality Inn & Suites Artesia – Cerritos
Rooms: 161
Buyer: Maya Inn & Suites Inc.
Seller: Hosanna Properties Inc.
Price: $13.8 million
Best Western Pasadena Royale Inn & Suites
Rooms: 61
Buyer: Grand Park Inn Inc.
Seller: American Koyu Corp.
Price: $12.7 million
Motel 6 Los Angeles – Bellflower
Rooms: 154
Buyer: 17220 Downey Bellflower
Seller: Accor
Price: $12.5 million
