Room to Grow: The State of LA's Hospitality Industry

08/13/2018 8:47 AM | Bill Hess for SCDF

As one of the largest travel destinations in the world, Los Angeles is a premier target for hospitality development. Some may argue that with the surge in short-term rental services, such as Airbnb, the need for hotel development is obsolete. However, not only is the hospitality sector thriving, but there is a shortage of hotel rooms throughout various sub-markets of the greater Los Angeles region.

Our State of the Los Angeles Hospitality Market panel on August 7, 2018 was a lively discussion comprised of speakers from various arenas within the hospitality industry. Moderated by Steven Sharp, editor and co-founder of Urbanize L.A., the panel included: real estate developer Ricardo Pagan, CEO of Claridge Properties; Hari Jun, director of development at Kimpton Hotels & Restaurants, and Jessica White, vice president of HVS, a hospitality-focused consulting firm.

Panelists discussed a range of hospitality-focused topics, such as challenges associated with the Los Angeles hospitality market, how the Los Angeles hospitality market compares to other markets, the shortage of hotel room options in certain sub-markets, what hotel guests are looking for in their experience and Los Angeles’ Transient Occupancy Tax (TOT).

Challenges Associated with the Los Angeles Market

Several of the most notable questions asked by the audience centered on the lack of hotel developments in Los Angeles. All panelists agreed the largest factor contributing to the scarcity of new hotels boils down to costs. The cost per square foot to build a new commercial development is simply too high for many developers and investors. The Los Angeles market was compared to its East Coast counterpart, New York City, which is also burdened with sky-high construction costs. New York City has seen a steady decrease in new developments of any kind, simply because the cost is significant. Construction costs, the price of building materials and labor, as well as recent tariffs, have all contributed to the decline in new hospitality-related developments in both Los Angeles and New York City in recent years.

Panelists noted the reluctance of the metro area to catch up to speed with the rest of the nation in terms of facilities and development practices.

“The city of Los Angeles has a hole in the sophistication of its development practices,” said Pagan, referring to his experience working in New York.

Pagan commented on his latest development, Angel’s Landing, and how the public has responded to the new development’s lack of parking spaces. The development will contain just 465 parking spaces for 675 residential units, two hotels, dining locations, an elementary school, plus an additional 45,000 square feet of retail space.

“The square footage that would have been used for parking would be better served as commercial or retail use,” Pagan said. “The development team and possibly the city may be looking for a way to encourage people to use public transit or ridesharing.”

Shortages across Greater Los Angeles Area Sub-Markets

Panelists agreed that while the metro-area has been able to adapt to taxes and rate increases, it has created a gap in the market. Many current hotels cater to either a higher-end and luxury-oriented consumer, while most others serve no-frills budget travelers, with not much in between.

“There is definitely a gap in the market,” said Jun. “We at Kimpton have identified this gap and we are working to fill it,” she continued.

Jun highlighted the recent completion of the Kimpton Everly Hotel in the Hollywood Hills, what she describes as a casual, yet sophisticated establishment that is designed to meet the vibe of the surrounding neighborhood and environment. With a light and airy ambience, modern décor and “upscale-casual” dining options such as Jane Q, the hotel provides guests a chance to feel what it would be like to be a resident of Hollywood Hills, rather than just as the typical hotel guest experience.

While the addition of hotels such as Kimpton Everly are meeting needs of hotel guests, there is still a shortage of hotels at the mid-level price point and a shortage of rooms in general.

“There are several pockets in Los Angeles County and Orange County that are simply under-utilized,” said White. “The area between Huntington Beach to Redondo Beach, which encompasses many square miles, is lacking in hotel options and has great potential.”

The panel touched on the upcoming Los Angeles 2028 Summer Olympics. White mentioned neighborhoods in Los Angeles such as Long Beach that have the potential to become hotel meccas. She said developers are already preparing Long Beach for the upcoming Olympic Games since the majority of the water sports will be hosted in the area.

Pagan addressed the fact that developers must be cautious when preparing for Olympic Games and not overbuild, leading to an oversupply of developed properties that could potentially lead to “ghost towns.”

Designing For Guest Satisfaction

The panel discussed what the most important factors are when designing hotels for guest satisfaction. Although the panel touched on the fact that no hotel is built for the same guest, they agreed that convenience is key.

“Room design is the bottom line when it comes to a successful hotel development,” said White. “This can be as simple as designing a hotel room that has charging outlets in convenient locations.”

The panel discussed the rise in mixed-use hotel developments and the importance of integrating amenities such as rooftops, bars and restaurants that all cater to a successful hotel development. The panel mentioned how 24/7 operations such as JW Marriott in Koreatown are becoming the norm, with condos and hotel rooms all under one roof.

“Being thoughtful about the programming behind hotel rooftops is important,” said Jun. “It is crucial that developers be creative in amenity choices to ensure guests actually come and utilize these spaces.”

Transient-Occupancy-Tax (TOT)

Another topic the panel touched on was the issue of transient-occupancy-tax (TOT). According to the Los Angeles Office of Finance, this tax is best described as a rental tax that is paid by the hotel guest for short-term rentals up to 30 days. Contrary to popular belief, this is not a tax on the business operator. Rather, this tax is passed down to the consumer and also applies to all internet-rental services such as Airbnb, HomeAway and VRBO.

“Many people are misunderstanding this,” said Pagan. “Essentially it is revenue you are creating through the sale and usage of rooms.” 

Currently, the TOT rate in the city of Los Angeles is 14 percent and is applicable to all properties rented to transients. By this legal statute, transients are defined as any person who exercises occupancy or is entitled to occupancy for 30 days or less. Surely, this added 14 percent tax will drive up the total cost of staying in a Los Angeles hotel, which might seem problematic to the untrained eye.

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