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Why Investors and Lenders Are Betting on LA’s Hospitality Market

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As the LA market continues to heat up across all sectors and with a fear of looming interest rate hikes, financing major developments has become a hot topic. For hotels, one of the hotter strategies is EB-5 funding.

Why Investors and Lenders Are Betting on LA’s Hospitality Market

San Francisco-based developer Sonnenblick’s principal, Bob Sonnenblick (pictured here with Athens Group COO Jay Newman), launched the discussion of hotel investment and development at Bisnow’s 3rd Annual LA Hospitality Boom event last week, discussing capitalization of an $80M hotel his company is developing on USC’s medical campus. In financing the project, his firm put up 25% equity and secured a loan for 50% of the cost at 5% interest. But instead of filling the 25% equity gap with mezzanine money at 12% to 14%, his firm leveraged EB-5 funds at “an unbelievable 6%” rate, he says.

“EB-5 money is a game changer,” Bob says. He noted EB-5 doesn’t work for everyone, as securing funding is a one-year process. “We had time to wait, because it took that long to get the project entitled,” Bob says. The program may not be available much longer; Congress is scheduled to consider a bill to limit it.

Why Investors and Lenders Are Betting on LA’s Hospitality Market

Athens, which develops resort hotels, is developing One Beverly Hills, a $1.2B mixed-use project, in partnership with Dalian Wanda Group, China’s largest commercial developer. This project at the gateway to Beverly Hills on the old Robinson-May store site between Wilshire and Santa Monica boulevards consists of a 134-room luxury resort hotel and 193 ultra-luxury private residences that will sell for $3k/SF. Jay says if it’s in the right location, there’s no problem getting money for (hotel) projects.

Land costs and entitlements are the biggest problem today,” Jay says, noting both Beverly Hills and Santa Monica have incredible barriers to entry. Jay notes, however, that both cities enjoy 80% hotel occupancy, which is considered “'overheated,' so it’s great to be an owner." Athens owns Santa Monica’s Miramar Hotel at the corner of Wilshire and Ocean boulevards and is currently redeveloping it.

Bob and Jay say they walked away from deals in Downtown LA, where RevPAR is at $300 to $400/SF, focusing instead on Beverly Hills and Santa Monica, where RevPAR is in the $600/SF range.

Why Investors and Lenders Are Betting on LA’s Hospitality Market

The Chartres Lodging Group co-founder and president Maki Bara (pictured here with Simon Ziff) points out, however, that Downtown LA is among the top five of the top 30 US hospitality markets. “Downtown LA still has a high supply of customers, and the average room rate is $30 above peak rates in most surrounding markets,” she says.

Simon asked panelists why Chinese investors have such a big appetite for LA real estate right now.

Why Investors and Lenders Are Betting on LA’s Hospitality Market

World Trade Center Los Angeles president Stephen Cheung (here with Jay Newman) points out Downtown LA has 15 hotels with 4,000 rooms coming on line, and a lot of them are owned by Chinese investors, who are making a more determined effort to invest in LA due to the downward plunge of China’s stock market last summer.

Noting that almost all of the Chinese projects were pre-entitled, Stephen points out that Hazens is the first to go through the entitlement process, and Wanda secured a local partner. “The Chinese are smart investors,” he says. “They realize the entitlement process is complex here and hire local people familiar with the different rules in the city and county.”

Why Investors and Lenders Are Betting on LA’s Hospitality Market

Stephen predicts Chinese interest in LA will wane or drop by 2019. Bob believes the Chinese investment phenomenon is a wave that is likely to disappear over the next decade. He compared it to the Japanese investment boon in the 1990s, saying, “In 1990 the Japanese were buying up everything. It is a similar thing with the Chinese.”

But Jay points out the Japanese are still heavily invested here, because this is the US Gateway Pan-Asian City. He also suggests that it’s not nearly over yet, as last year LA experienced a 6.8% increase in Chinese visitors, and with Universal opening the Harry Potter amusement park here, even more Chinese travelers will visit LA in coming years.

According to the LA Economic Development Corp, 575,000 of LA’s foreign visitors in 2014 were from China, up from 158,000 in 2009. The group predicts that by 2020, that number will increase to 2 million.