Some Developers Could Pivot Project to Residential Uses
Tough times for the travel industry during the coronavirus pandemic spurred a 17% decline in hotel construction in California, coming off a record-setting year for the state that traditionally leads the nation for hotel room demand and development.
The number of California hotels under construction dropped to 194 in the first six months of 2020 from 234 in the same period last year, as total rooms under construction declined nearly 20% to 26,418, according to hotel brokerage and research firm Atlas Hospitality Group.
“We are forecasting that the vast majority of hotel projects in planning will simply not get built,” said Alan Reay, president of brokerage and research firm Atlas Hospitality Group in a new midyear development report. “Developers are already looking at other uses, namely residential.”
The pandemic has created significant financial uncertainty that could affect developer appetites to build the new hotels that are in the state’s long-term pipeline, at a time when many current hotels are struggling to reopen and get customers to return, especially in coastal regions including Los Angeles, San Diego and Orange County.
California has historically been the state with the biggest demand for hotels, driven by popular visitor attractions such as Disneyland Resort in Orange County and business travel tied to Silicon Valley’s high-tech industry and Los Angeles-based media production. All of these sectors have been shut down or seen business significantly curtailed during the pandemic.
The current development slowdown comes as hotel occupancy rates in major California markets are down sharply during what would normally be the peak of summer-season business in the days before the pandemic.
Data from travel research firm STR, a CoStar Group company, show that instead of the usual Southern California occupancy rate in the mid-70% to mid-80% range, Orange County’s hotel occupancy for the first seven months of 2020 stood at 46.4%, with Los Angeles and San Diego counties both at 50%.
Most California markets this year have seen concurrent drops in daily room rates and revenue, two key metrics that traditionally incentivize developers and investors to build and buy hotels, or hold back on deals.
Atlas reported that Los Angeles County led the state in the first half of the year, with 49 hotels and 7,650 total rooms under construction.
The largest hotel that opened in California during the first half was a 208-room Staybridge Suites in Irvine in Orange County.
Reay told CoStar News that California’s hotel demand and development prospects generally remain better than those of most states. One factor is that California has several cities that continue to attract drive-in business as customers from other nearby states opt to take road trips and avoid commercial air flights because of pandemic-related concerns.
“California is much better poised due to the drive-to markets and the fact that a lot of vacationers who would normally have gone to Hawaii are opting for California,” Reay said.