mgac q1 2016 hospitality market overview

HOSPITALITY MARKET OVERVIEWLOS ANGELES

As of the second quarter of 2016, the City of Los Angeles has 915

hotels and a total of 133,573 rooms – the second highest after

New York City. The hospitality market is robust, with a total of 95

new construction projects (ground up and conversion), and 74

ongoing renovation projects1. According to the Los Angeles County

Economic Development Corporation (LAEDC), the leisure and

hospitality industry added 9,700 jobs in 2014 and the construction

sector added 8,200 jobs during the same period2.

A geographic presentation of major hotel activities – for

transactions or development in the City of Los Angeles is illustrated

below. Activities are densely located primarily in Downtown Los

Angeles (DTLA) and the Los Angeles Airport (LAX) area. Six

upscale/luxury hotels are currently in construction, including the

InterContinental Wilshire Grand, Hotel Indigo at Metropolis, Century

Plaza Hotel, Oceanwide Plaza Hotel, Esplendor Hotel, and NoMad

Hotel. Another nine upscale hotels are under planning, including

the JW Marriott L.A. Live expansion, W Los Angeles Downtown,

and Proper Hotel Case Building, to name a few. Hotels in both

construction and planning are concentrated in DTLA.

1HotelMarketData2“2016 Southern California Lodging Forecast,” PKF Consulting & CBRE Hotels, 2015, http://www.ci.garden-grove.ca.us/internet/pdf/2016-so-cal-lodging-fore-cast.pdf

OVERVIEW OF LOS ANGELES HOSPITALITY MARKET

01 Hospitality // Los Angeles, CA

Status Open In Construction Planning

HOTEL DISTRIBUTION

During the three-year period from 2013 to 2015, the City has seen

consecutive increases in the number of new building permits

issued for commercial use, the volume indicating market strength.

According to Los Angeles Open Data3, this number has grown

almost exponentially: 80 commercial building permits were issued

in 2013, 153 commercial permits were issued in 2014, and 245

permits were issued in 2015. Downtown Los Angeles has amassed

the largest construction projects based on permit dollar values.

The map on the next page demonstrates the commercial building

permit locations during the period from 2013 to 2015. The size

of the circle represents the project value - the larger the circle,

the higher the value of the project. In 2015, the total value of

commercial building permits issued was almost $3.4 billion. The

map indicates that there are three construction hubs in the City

of Los Angeles including West Hollywood, the LAX area, and

Downtown Los Angeles which have exhibited the highest level

of activity, continuous increase in new commercial projects, and

growing amounts of investment injections. The heated activities at

Downtown have also spilled towards the periphery areas such as

Koreatown.

LOS ANGELES PERMITTING ENVIRONMENT


Source: MGAC, based on Los Angeles Open Data, Building Permits3Los Angeles Open Data

2013 2014 2015

The City has experienced several large transactions above $60 million dollars during the past five years.

• Pebblebrook Hotel Trust has completed two acquisitions within two years. In 2012, Pebblebrook Hotel Trust purchased the 258-room W Los Angeles - Westwood from Starwood for $125 million, approximately $485,000 per key. Then in 2014, the Trust acquired a leasehold interest in the 264-room Hotel Palomar Los Angeles-Westwood for $78.7 million, amounting to $298,000 per key, from a partnership led by Behringer Harvard Funds.

• Two significant acquisitions were made by Chinese investors

Hazens Real Estate Group acquired the 802 – room Sheraton Gateway for $96 million in 2013.

Sichuan Xinglida Group acquired the LAX Marriott for $160 million. It is worth noting that the LAX Marriott is the second acquisition made by Sichuan Xinglida Group, only one year after it acquired Torrance Marriott South Bay hotel in 2013.

• In August of 2015, the Ace Hotel at Downtown Los Angeles was sold for $103 million, over nine times its 2011 purchase price.

• In Jan 2016, an affiliate of Sunrider International purchased the SLS Beverly Hills from SBE Entertainment Group at a price of $178 million, culminating hospitality transactions till date.

A timeline of these significant transactions and their transaction amounts are mapped in the chart on the next page.

SIGNIFICANT RECENT TRANSACTIONS


Source: MGAC, based on data from Lodging Development Group

0M

20M

40M

60M

80M

100M

120M

140M

160M

180M

Hotel Palomar Los Angeles - WestwoodPebblebrook Hotel Trust

SLS at Beverly Hills, Luxury Collec onSunworld Dynasty US Holdings LLC

Ace Hotel Downtown Los AngelesChesapeake Lodging TrustSheraton Gateway Los Angeles

Hazens Real Estate Group

Los Angeles Airport MarrioSichuan Xinglida Group

W Los Angeles - WestwoodPebblebrook Hotel Trust

Transaction Date

Am

oun

t

2012 2013 2015 2014 2016

Tourism and related spending are directly correlated to lodging

performance. According to Los Angeles Tourism & Convention

Board, Los Angeles County welcomed 44.2 million people, a 4.8%

increase over 2013. Visitor spending amounted to a record $19.6

billion, a 6.8% increase from the previous year4. The following

table summarizes the number of overnight visitors to Los Angeles

County and their direct spending between 2004 and 2014. Los

Angeles tourism has recovered from the recession and showed

five consecutive years of increase in overnight visitation and direct

spending.

TOURISM AND SPENDING


4"The Downtown Los Angeles Renaissance – Economic Impacts and Trends," Beacon Economics, 2015, https://www.downtownla.com/images/re-ports/2015_09_03_-_Downtown_Renaissance.pdf

Los Angeles County

Year Overnight Visitation (Millions)

Percent Change

Direct Spend-ing (Billions)

Percent Change

2004 24.3 - 12.3 -

2005 25 2.90% 13.4 8.90%

2006 25.4 1.60% 14 4.50%

2007 25.9 2.00% 14.6 4.30%

2008 25.7 -0.80% 14.2 -2.70%

2009 23.9 -0.70% 12.2 -14.10%

2010 26.1 9.20% 13.8 13.10%

2011 27 3.40% 15.5 12.30%

2012 27.9 3.30% 16.6 7.10%

2013 28.5 2.20% 17.5 5.40%

2014 29.5 3.50% 18.7 6.90%

Source: CIC Research, Los Angeles Tourism & Convention Board

OVERNIGHT VISITOR VOLUMES AND EXPENDITURE

5"The Downtown Los Angeles Renaissance – Economic Impacts and Trends," Beacon Economics, 2015, https://www.downtownla.com/images/re-ports/2015_09_03_-_Downtown_Renaissance.pdf6“In Focus: Downtown Los Angeles Hotel Market,” HVS Global Hospitality Services, 2015, http://www.hvs.com/article/7352/in-focus-downtown-los-ange-les-hotel-market/

Undoubtedly, Downtown Los Angeles is an attraction for real estate

developers. By the end of 2015, Downtown Los Angeles accounted

for 1.2% of the land in the City of Los Angeles, but 5.3% of net total

assessed property value. Since the Downtown LA Renaissance

started in 1999, the amount of economic activity generated from

completed and planned construction has reached $29.1 billion

dollars5.

EXISTING HOTEL INVENTORY According to HVS surveys, Downtown Los Angeles enjoyed five

consecutive years of RevPAR increases6. The City’s hotel occupancy

rate hit 79% in 2014.

Downtown Los Angeles is currently the site of 13 major hotels,

including Westin Bonaventure, JW Marriott L.A. Live, and Millennium

Biltmore. Collectively, these hotels jointly provide 6568 rooms.

Demand for hotel supply is high. President and CEO of the Los

Angeles Tourism and Convention Board, Ernest Wooden, said that

“Demand is exceeding the supply of hotel rooms that we have right

now.” Wooden noted that the City and his office are aggressively

courting investors for new hotel projects, especially near the

convention center in Downtown, where the need is greatest. Over

the next several years, the City hopes to attract 4,000 additional

hotel rooms to overcome the lodging shortage.

DOWNTOWN LOS ANGELES


Source: Smith Travel Research

Hotel Number of Rooms

Westin Bonaventure 1358

JW Marriott Los Angeles L.A. LIVE 878

Millennium Biltmore 683

Sheraton Downtown 496

The LA Hotel Downtown 469

Omni Hotel Los Angeles 453

Double Tree by Hilton 434

Hotel Figeueroa 278

Residence Inn Los Angeles L.A. LIVE 219

The Standard Downtown LA 207

Hilton Checkers 193

Ace Hotel Downtown Los Angeles 182

Luxe City Center Hotel 175

Courtyard Los Angeles L.A. LIVE 174

Miyako Hotel 174

Ritz-Carlton Los Angeles 123

Los Angeles Athletic Club Hotel 72

Major Hotel Supply in DTLA 6568

NEW DEVELOPMENTS (PIPELINES)Thirteen hotel projects are in the pipeline (under construction or planning), with an additional 4,339

rooms under way. The following charts outline these projects and their geographic locations.

Downtown Los Angeles has been a hot spot for Asian capital investors. Some of the biggest projects in

pipeline include the InterContinental Wilshire Grand by Korean Air, Hotel Indigo at Metropolis by Chinese

real estate developer Greenland, the Oceanwide Plaza by Beijing-based developer Beijing Oceanwide,

and the W Hotel by Chinese developer Shenzhen Hazens Real Estate Group.

DOWNTOWN LOS ANGELES


Hotel Status Number of Rooms

InterContinental Wilshire Grand In Construction 900

JW Marriott Expansion Planning 755

Hotel Indigo Los Angeles at Metropolis In Construction 350

W Los Angeles Downtown Planning 250

NoMad Hotel Los Angeles In Construction 250

Freehand Hostel - Commercial Exchange In Construction 200

Esplendor Hotel / Trinity Auditorium In Construction 183

Oceanwide Plaza Hotel In Construction 183

Lizard In Los Angeles Planning Planning 176

Hoxton Hotel Planning Planning 150

Proper Hotel Case Building Planning 148

Total Pipeline 4339

InterContinental Wilshire Grand

Hotel Indigo Los Angeles at Metropolis

Esplendor Hotel / Trinity Auditorium

W Los Angeles Downtown

Proper Hotel Case Building

Oceanwide Plaza Hotel

JW Marriott

Hoxton Hotel

NoMad Hotel Los Angeles

Lizard In Los Angeles

Freehand Hostel - Commercial Exchange

Source: MGAC, based on data from Lodging Development Group

SIGNATURE PROJECTS


INTERCONTINENTAL WILSHIRE GRANDThe 900 room, 73 story hotel will soon be the tallest building in

the west, set to open in 2017. The owner and developer of the $1.1

billion dollar project is Korean Air. The 1,100-foot tall structure will

have four-star hotel rooms on the upper floors of the edifice, above

400,000 square feet of office space. The project will also include

stores, restaurants, and amenities. Upon completion, the hotel will

be the largest InterContinental in the Americas, and the first hotel on

the West Coast to have a “sky lobby”.

Architect: AC Martin

Contractor: Turner Construction

Project Management: affiliated Martin Project Management

Construction Start: Feb 2013

Construction End: 2017

W HOTELThe W Hotel is coming to downtown Los Angeles as part of a $700

million mixed-use, tower project being planned across from Staples

Center by Chinese developers Shenzhen Hazens Real Estate Group.

The 250 room W Los Angeles Downtown, part of the Starwood

family of hotels, will replace the existing Luxe Hotel, set to open in

2019.

Architect: Gensler

Construction Start: 2017

Construction End: 2019

AC Martin

Gensler

HOTEL INDIGO AT METROPOLIS350 room Hotel Indigo is part of the more than $1 billion Metropolis

development in downtown Los Angeles by Greenland USA, the

American division of Greenland Group, one of China’s largest real

estate developers. The 18 story Hotel Indigo Downtown Los Angeles

is intended to serve growing hotel demand in the blocks near the

Los Angeles Convention Center and Staples Center.

Architect: Gensler

Contractor: Webcor Builders

Construction Start: Jul 2014

Construction End: End of 2016

OCEANWIDE PLAZADeveloped by China’s Oceanwide Real Estate Group, the project will

be highlighted by of a trio of skyline-altering towers featuring 504

condominiums and a 183 key luxury hotel. “We feel that Downtown

L.A. has become the most vibrant area of Los Angeles, and we look

forward to helping accelerate its growth and adding to its renewed

vitality,” said Thomas Feng, CEO of Tohigh Construction Investment,

Oceanwide’s local subsidiary.

Architect: RTKL

Contractor: LendLease

Construction Start: March 2015

Construction End: June 2018

RTKL

Gensler

The following table shows the combined lodging performance of major downtown hotels that have

average daily rates above $130.00. From 2010 to 2014, the occupancy rate saw a steady increase.

According to the PKF forecast, occupancy rates for major downtown hotels will reach 77.7% in 2016, with

average daily rates of $216.79 and revenue per available room (RevPAR) of $168.42.

LODGING PERFORMANCE


Historical Market Performance of the Competitive Supply

Year Annual Supply Percent change

Occupied Rooms

Percent Change

2010 1,956,035 - 1,260,9988 -

2011 2,290,375 17.10% 1,540,007 22.10%

2012 2,014,800 -12% 1,500,330 -2.60%

2013 2,014,800 0 1,532,402 2.10%

2014 2,117,365 5.10% 1,610,934 5.10%

2015E 2,218,105 4.80% 1,706,132 5.90%

2016F 2,229,055 0.50% 1,731,724 1.50%

CAAG 2.20% 5.4%

Source: PKF Consulting USA and CBRE Hotels

Historical Market Performance of the Competitive Supply

Market Occupancy

Average Daily Rate

Percent Change

RevPAR ($)

Percent Change

64.5% 132.95 - 85.71 -

67.20% 152.43 14.7% 102.49 19.6%

74.50% 170.53 11.9% 126.98 23.9%

76.10% 178.44 4.6% 135.71 6.9%

76.10% 192.93 8.1% 146.78 8.2%

76.90% 204.52 6.0% 157.31 7.2%

77.70% 216.79 6.0% 168.42 7.1%

8.5% 11.9%

LAND PRICESThe heated activities in Los Angeles also create challenges for

developers who seek to enter the market. High construction volume

drives up land and labor costs. Competition from Airbnb and

other vacation rental businesses such as VRBO encroaches on the

hospitality market.

In examining the land prices published by Lincoln Institute of

Land Policy, the dataset below captures the average land price for

single-family owner-occupied housing units for 46 of the largest

metropolitan areas in the United States. The chart on the next page

illustrates a horizontal comparison of land prices across the 46

metropolitan areas as of the 3rd quarter of 2015. The City of Los

Angeles has the 5th highest land prices.

CHALLENGES


Pitt

sbur

ghO

klah

oma

City

San

Ant

onio

St.

Loui

sIn

dian

apol

isM

emph

isD

etro

itK

ansa

s C

ityB

uffa

loH

oust

on

Roc

hes

ter

Fort

Wor

thB

irmin

gham

Cin

cinn

ati

Cle

vela

ndA

tlant

aN

ew O

rlean

sM

ilwau

kee

Col

umbu

sM

inne

apol

is S

t. P

aul

Tam

pa

Sal

t La

ke C

ityD

alla

sD

enve

rP

hila

delp

hia

Chi

cago

Cha

rlotte

Nor

folk

Har

tford

Pho

enix

San

Ber

nar

dino

Pro

vid

ence

Por

tland

Sac

ram

ento

Bal

timor

eS

eattl

eM

iam

iW

ashi

ngto

n, D

.C.

New

Yor

kB

osto

nS

an D

iego

Los

Ang

eles

Oak

land

San

ta A

naS

an J

ose

San

Fra

ncis

co

0M

5M

10M

15M

20M

25M

30M

35M

40M

45M

50M

55M

60M

65M

70M

Land

Val

ue

.

Metropolitan Area

Source: MGAC, based on data from Lincoln Institute of Land Policy and U.S. Bureau of Labor Statistics


Note: Historical land prices are adjusted to inflation using June 2015 urban CPI as the base. Source: MGAC, based on data from Lincoln Institute of Land Policy and U.S. Bureau of Labor Statistics

LAND PRICES (continued)The vertical axis shows the City’s land price changes from 1985

to 2015 (prices adjusted for inflation). The City of Los Angeles is

experiencing a surge in land prices after the market collapse of 2008

and 2009.

$0.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

$500,000.00

$600,000.00

1985

Q1

1985

Q4

1986

Q3

1987

Q2

1988

Q1

1988

Q4

1989

Q3

1990

Q2

1991

Q1

1991

Q4

1992

Q3

1993

Q2

1994

Q1

1994

Q4

1995

Q3

1996

Q2

1997

Q1

1997

Q4

1998

Q3

1999

Q2

2000

Q1

2000

Q4

2001

Q3

2002

Q2

2003

Q1

2003

Q4

2004

Q3

2005

Q2

2006

Q1

2006

Q4

2007

Q3

2008

Q2

2009

Q1

2009

Q4

2010

Q3

2011

Q2

2012

Q1

2012

Q4

2013

Q3

2014

Q2

2015

Q1

InflationAdjustedHistoricalLandValueinLosAngeles

CHALLENGES


LABOR COSTSLabor costs are another important aspect for evaluation in the construction industry. According to data

from the Bureau of Labor Statistics, as of May 2015, the State of California has a median hourly wage

of $18.16 for construction laborers, ranking as the 13th state with the highest construction laborer cost.

Among major West Coast metropolitan areas, construction labor costs for the City of Los Angeles lies in

the middle, with a median hourly wage of $18.36, as opposed to $23.82 in San Francisco.

0

5

10

15

20

25

Hou

rly m

edia

n w

age

18.360

15.340 15.87016.820 17.030

20.330 20.34021.890 22.320

23.820

Metropolitan Area

Portland Anaheim Riverside SanDiego

LosAngeles

San Jose Sacramento Seattle Oakland SanFrancisco

Pue

rto

Ric

oG

uam

Ark

ans

asN

orth

Car

olin

aM

issi

ssip

piG

eorg

iaA

laba

ma

Flor

ida

Sou

th D

akot

aN

ew M

exic

oId

aho

Sou

th C

arol

ina

Texa

sN

ebra

ska

Tenn

esse

eV

irgin

iaLo

uisi

ana

Okl

ahom

aW

est

Virg

inia

Uta

hM

ain

eA

rizon

aV

irgin

Isla

nds

Ver

mon

tK

ansa

sM

aryl

and

Ken

tuck

yC

olor

ado

Iow

aO

rego

nW

yom

ing

New

Ham

pshi

reD

elaw

are

Mon

tana

Pen

nsyl

vani

aM

ichi

gan

Nev

ada

Ohi

oW

isco

nsin

Nor

th D

akot

aM

isso

uri

Cal

iforn

iaR

hode

Isla

ndD

istri

ct o

f Col

umbi

aIn

dian

aN

ew Y

ork

Was

hing

ton

Min

neso

taC

onne

ctic

utN

ew J

erse

yA

lask

aM

assa

chus

ett

sIll

inoi

sH

awai

i

0

2

4

6

8

10

12

14

16

18

20

22

24

26

Hou

rly m

edia

n w

age

12.7

5

16.0

5

12.5

5

13.1

5

18.4

5

13.5

5

16.6

5

10.0

811

.59

15.9

8

15.2

8

12.7

8

22.3

9

14.2

8

21.9

8

18.6

8

19.0

9

16.4

9

15.9

8

13.8

8

23.9

3

12.7

3

13.3

3

13.1

7 14.1

7

14.4

7

13.9

7

15.4

315

.57

15.2

7 16.0

7

17.7

7

18.3

3

17.9

3

19.9

7

23.6

7

17.5

617

.66

18.1

6

13.2

6

24.0

6

13.8

0

17.8

0

13.4

413

.34

17.1

4 18.4

2

18.9

2

14.0

2

13.6

2 14.6

1

13.7

1

12.8

1

8.63

State

CHALLENGES

7“Study: Airbnb poses threat to hotel industry,”USA Today, 2 February 2016, http://www.usatoday.com/story/travel/ho-tels/2016/02/02/airbnb-hotel-industry-threat-index/79651502/.8“The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry,” Georgios Zervas, Davide Proserpio & John W. Byers, http://people.bu.edu/zg/publications/airbnb.pdf, 27 January 2016.9“How Airbnb Is Surging in Downtown,” LADT News, http://www.ladowntownnews.com/news/how-airbnb-is-surging-in-downtown/article_d25adf98-ecfa-11e4-ae61-6b1d2584def4.html, 28 April 2015.10“At L.A. City Hall, it's the visionary vs. the lawmakers,” Los Angeles Times, http://www.latimes.com/local/california/la-me-adv-shar-ing-economy-20150818-story.html, 21 April 2016.


COMPETITIONWith the rising popularity of the sharing economy, Airbnb, as a lodging alternative, is eating into the

hospitality market. However, its impact is hard to estimate. Controversy revolves around whether

Airbnb will evolve into a viable mainstream option, or a position as a niche market. According to a new

study by CBRE Hotels’ Americas Research, travelers spent $2.4 billion on Airbnb lodging from October

2014 to September 2015. Although it only accounts for 1.7% of the $141 billion generated by hotels,

it’s a significant jump from the same time period the previous year7. A recent empirical study done by

Boston University estimating the impact of Airbnb on the hotel industry in Texas found that the sharing

economy is paving way to acquiring market shares from incumbents. The impact is non-uniform - lower-

priced hotels and hotels not catering to business travelers are mostly impacted. Worth noting, those

hotels affected responded to the competition by lowering prices8.

According to PKF Consulting, one concern for the hospitality industry is that Airbnb and other vacation

rental businesses are operating like hotels, without paying any relevant taxes or fees9. Policymakers

in Los Angeles and other major U.S. cities have begun discussing how to regulate the vacation rental

market. Los Angeles Mayor Eric Garcetti, in his State of the City address in the Spring 2015, said that the

City would soon forge a deal with Airbnb to collect tourist taxes from those who book rooms through

Airbnb. However, a panel of city council members decided to hold off on the plan until they came up

with a way to regulate online platforms that connect travelers with hosts10.

CHALLENGES

mgac.com

DERMOT RYANManaging Director, [email protected]