West Los Angeles And Santa Monica - Hotel Market Overview

The sub-markets of West Los Angeles and Santa Monica, which total over 11,000 rooms, have continued to perform well as a result of the strength of the advertising, entertainment, and internet industries and the overall improved business climate of the region. The appeal of the Westside to both international and domestic tourists has also contributed to the success of these sub-markets, recording some of the highest occupancies in Los Angeles.

West Los Angeles & Santa Monica Overview

The sub-market of Santa Monica and West Los Angeles, which encompasses the sub-markets of Westwood, Century City, Beverly Hills and West Hollywood offer an aggregate daily inventory of 8,638 luxury, deluxe, and first class hotel rooms. The market's performance once again increased during 2000, with an estimated overall occupancy rate at 73.1 percent.

West Los Angeles and Santa Monica's average daily rates have shown the most robust growth increasing at a compound annual growth rate (CAGR) of 6.8 percent from 1996 through 2000. Though growth in ADR declined to 4.0 percent in 1999 after two years of more significant growth (averaging 10.5 percent), the pace of growth accelerated to 8.0 percent in 2000, estimated at approximately $218.00.

The luxury markets of West Los Angeles and Santa Monica have historically recorded higher occupancy rates and substantially higher ADRs than the market as a whole. Rebounding from additions to new supply in 1998 and 1999, the occupancy and ADR figures are estimated for 2000 at approximately 73 percent and $373 respectively, with ADRs showing a premium of 67 percent over the market as a whole. Our recent interviews indicated the luxury market should continue real rates of ADR growth into 2001.

The sub-markets of West Los Angeles and Santa Monica have reflected steady growth over the last four years, increasing demand and, more considerably, rate at compound growth rates of 3.24 percent and 8.2 percent respectively.

Presented in the following table is a summary for the past four-years and forecasted 2001-market performances for the Santa Monica and West Los Angeles sub-markets.

With extremely high barriers to entry, both the West Los Angeles and Santa Monica hotel markets have continued to reflect minimal additions to supply. The following chart indicates recent or proposed additions over the next few years:

It should be noted that both of the recent additions in Santa Monica are the result of ten-plus years of battling through the entitlement process. Le Merigot received its approvals (entitlements) in the late 1980s and, during the recession, the developer did just enough work on the site to keep the approvals in force. The Casa del Mar hotel was rehabbed from the Pritiken Longevity Center, after a successful legal battle, which upheld the legitimacy of a hotel-specific business license maintained by the property since 1926. These latest additions to supply will most likely mark the end of hotel development in Santa Monica for the foreseeable future unless the hotel moratorium enacted in 1990 is overturned.

According to the Planning Department of the City of Beverly Hills, there is a significant amount of resistance by residents to new hotel development that is further supported by results of traffic impact studies of the area. A recent example of resident opposition was with the proposed Grand Plaza Hotel, a 204-room, super-upscale hotel proposed early last year for the corner of Wilshire Boulevard and Linden Drive that was unsuccessful in achieving approvals. The proposed Hotel Bel Jardin, which will be heard again before the Planning Commission on April 25, 2001, is also projected to encounter similar difficulties.

From the above list, West Hollywood seems more amenable for new hotel supply with several recently proposed developments. Though the recent proposal to add the 193-key Hotel Astra on Sunset Boulevard (a few blocks from the Beverly Hills border) was abandoned due to financing difficulties, other developments in West Hollywood have been proposed. These include a hotel within the Sunset Millennium project (key count and operator yet to be identified) and a recent proposal for a hotel next door to the House of Blues to be called "The Edge."

Outlook

Los Angeles County as a whole has seen a compound average annual growth in supply of less than one percent over the last ten years. With occupancies in the mid-seventies to the low eighties in certain sub-markets, local tourism officials have begun to worry about Los Angeles County's limited stock of hotels and the increasing demand. Though these conditions will solidify the strength of the Los Angeles hotel market, and more specifically certain sub-markets such as Beverly Hills and Santa Monica, tourism officials have expressed concern about the future. With stiffer conditions on financing for hotel construction and a shortage of land where hotels make economic sense, tourism officials believe Los Angeles tourism, the third-leading revenue producer for the county, will lose group segment market share to the growing supply of new rooms in Orange and San Diego Counties. Limited supply growth is expected to continue within Los Angeles, and more particularly, in Santa Monica and Beverly Hills where residents are less receptive to new developments due to congestion in these communities and further supported by the moratorium on future hotel development in Santa Monica.

Though the long-term outlook for West Los Angeles and Santa Monica is extremely positive, the looming possibility of strikes by three major entertainment unions will have a significant impact on its 2001 performance. The Writers' Guild strike could start as early as May 1, 2001, with the Screen Actors Guild (SAG) and the American Federation of Television and Radio Artists (AFTRA) following suit on July 1, 2001. While the estimates vary, the Los Angeles County Economic Development Corporation (LAEDC) approximates that the direct economic impact of the strike would be $250 million a week with an indirect effect on the local economy of approximately $257 million a week. The Entertainment Industry Development Corporation (EIDC) declined to comment on the status of the Writers' Guild contract negotiations, which have been underway for some time, but recently broke down. According to a March 5 article in the New York Times, the breakdown in negotiations has left many not wondering "if", but "who" will be hurt the worst when the strike commences at midnight on May 1. The SAG and AFTRA negotiations with the major studios have yet to begin.

From interviews with several sales and marketing directors of Westside luxury hotels, there seems to be ample concern for what they consider an inevitable strike. Those interviewed projected 2001 occupancies will remain flat or slightly lower, partly due to a slowing economy and resulting from a potential strike. However, ADRs are projected to grow between $20 and $30 (approximately 6.0 percent) for 2001. Those hotels most dependent upon the entertainment industry expressed the greatest concern though there was some belief that the strike would not be long lasting due to its financial cost to the striking members and studios.

While fears of a local recession prevailed, hoteliers indicated to a lesser degree concern for a national recession. Several of those interviewed indicated a slight decline in their travel segment,

speculating this was a result of the slowing economy and a decrease in personal stock portfolios. Others interviewed indicated they had not yet seen any effect, but were aware of the nearing probability. Though the economic outlook seemed more positive in January and February compared to the sharp slowdown at the end of 2000, the Federal Open Market Committee's belief that, "...the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," was confirmed on March 20 with a 50 basis point reduction in the Federal Funds Rate, the third decrease since January 1, 2001. Maintaining partiality towards a

weakening economy, the Federal Reserve Committee announced another 50 basis point reduction in the Federal Funds Rate and a 50 basis point reduction in the Discount Rate on Wednesday, April 18. This marked the second time this year the Fed has moved to cut interest rates between regularly scheduled monetary policy meetings.

Further concerns were also expressed about the cost of the California energy crisis to Los Angeles area hotels. Though there did not seem to be concern of rolling blackouts, there was much concern about the rising energy prices and its affect to the bottom line. According to a recent article in the San Francisco Chronicle, such increases have already been passed onto the consumer in the form of a "utility surcharge" line item included on a guest's bill. Rather than raising rates, this new line item is meant to be a temporary fee, but may very well be an early sign that rate hikes will be needed to help shoulder the soaring energy prices affecting California. According to the article, major brands have already applied this fee to their West Coast hotels.

Another recent threat to hotels across the nation is the pending strikes of four major U.S. airlines, specifically Delta, United, American and Northwest. Contract negotiations underway between Northwest and the Aircraft Mechanics Fraternal Association recently broke down which began a 30-day countdown to a strike. Just as a cooling-off period was to expire on March 12, President Bush announced the appointment of an emergency board to assist in a potential settlement delaying the strike another 60 days to mid-May. With strikes expected within the other three major airlines over the next few months, President Bush's actions will set a precedent, as both the local and national economy will be threatened. While we believe that there will be at least one strike in the entertainment industry, we have assumed that the airline strike, if it occurs will be of a very short duration and will have a nominal effect on hotel occupancies.

Overall, the long-term outlook for West Los Angeles and Santa Monica remains strong. With continued strong demand for rooms and a stable market supply condition, hotels on the Westside will likely continue to show above-inflationary increases in ADR while maintaining healthy occupancies. Short-term hotel performance may be hampered by a local strike and a slowdown in the economy, but if marketing directors of local hotels are forecasting a 6.0 percent growth in ADR, they are concerned more about a diminished opportunity than losing ground.