Market Pulse: Downtown Los Angeles
By Jessica White, Consulting & Valuation Analyst at HVS and Greg Mendell, Appraisal Associate at HVS
Downtown Los Angeles (DTLA), the Central Business District of the city of Los Angeles, covers the area bounded by Interstate 110, Interstate 10, and the Los Angeles River. In the last two decades, attractions like the Staples Center, Walt Disney Concert Hall, and the $3-billion L.A. LIVE entertainment complex have helped reestablish DTLA as a popular destination. In recent years, several multi-unit residential and commercial developments have changed the landscape significantly. The mixed-use Metropolis project (now under construction), the redevelopment of the BLOC retail center, and the addition of the Broad Museum are just a few projects that have advanced DTLA's renaissance in recent years.
DTLA currently has about 9,700 rooms of existing hotel inventory. Branded and independent full-service and boutique hotels dominate the market, such as the JW Marriott Los Angeles LA Live, The Standard Downtown LA, and the Millennium Biltmore. The most recent additions to the market include the Freehand Los Angeles, Hotel Indigo Los Angeles Downtown, and InterContinental Los Angeles Downtown, all of which opened in 2017.
Four new hotels have opened in DTLA within the last year. Maybe the most unique of these properties is the Tuck Hotel, which opened in the Fashion District. Unlike many of the properties proposed or operating in the downtown area, the Tuck Hotel is small, featuring only 14 guestrooms. The property, which opened in December 2016, offers three different room types ranging from 320 to 450 square feet, as well as a restaurant and bar. Owner Juan Pablo Torre wanted to create a different offering within the market, explaining that the name is an allusion to the "tuck shops" found in the United Kingdom, which are small retailers known for selling candy.
The other three hotels that haven opened during this timeframe dwarf the Tuck Hotel in terms of room count. The Hotel Indigo, located in the L.A. LIVE/Convention Center submarket and part of the larger Metropolis development, initially had a soft opening in April 2017, before fully opening in June. Featuring a 1920's Prohibition-era design, the 18-story property includes a lobby-level restaurant, a top-floor cocktail lounge, a 9,100-square-foot outdoor pool terrace, a 24-hour fitness center, and 22,000 square feet of meeting space. The larger Metropolis development is expected to include an indoor/outdoor, 70,000-square-foot retail pavilion and three residential towers with resort-style amenities.
The Freehand Los Angeles opened in June 2017 in the South Park submarket. Developed by the Sydell Group, this property offers 167 private rooms and 59 shared rooms. While the private rooms are more typical to your standard hotel room, featuring nubby textures and earthy, natural tones, the shared rooms closer resemble that of a hostel. However, these are not your typical hostel rooms; the shared rooms feature bunk beds made of solid wood, the same mattresses used in Sydell Group's luxury NoMad Hotels, and private in-suite bathrooms. Furthermore, the hotel's rooftop bar, known as "Broken Shaker," opened in July, offering an eclectic menu of handcrafted cocktails and small bites.
The largest of Downtown's new openings is the 889-room InterContinental Los Angeles Downtown, located in the Financial District. Part of the $1.35-billion, 73-story Wilshire Grand tower, which is now the tallest building west of the Mississippi, the property occupies the 31st to 68th floors and includes 95,000 square feet of event space, as well as six food and beverage outlets; it is the largest InterContinental in the Americas. The property's rooftop bar, Spire 73, is the highest open-air bar in the Western Hemisphere.
Meanwhile, the NoMad Hotel in the Financial District has been completed as well. The project involves the conversion of Giannini Place, the former Bank of Italy Building at 7th and Olive Streets, to a luxury property that contains 241 guestrooms, ground-floor retail and restaurant space, meeting rooms, a rooftop pool, and an event deck. Sydell Group, which also recently opened the Freehand Los Angeles, opened this property on January 21, 2018.
Proposed Hotel Developments
Recent hotel development has been astounding, with roughly 1,500 rooms currently under construction, and nearly another 5,000 in the development pipeline. DTLA's incoming supply represents a potential 80% increase to the existing inventory. Since the start of 2014, five properties containing almost 1,800 rooms have opened.
The majority of hotel development is taking place within the L.A. LIVE/Convention Center area and the adjacent South Park district, which has been spurred by the expectation of an expansion to the Los Angeles Convention Center, as well as the City's 2013 goal of having 8,000 hotel rooms within three-quarters of a mile of the convention center by 2020. Some of the more notable proposed developments include the Park Hyatt Oceanwide Plaza, the NoMad Hotel, the 1300 Figueroa Development, the Fig + Pico Triple Hotel, and the W Downtown.
The 1300 Figueroa Development is currently in the early stages of development; plans call for a 53-story skyscraper by developer TriCal Construction, which would be located across Figueroa Street from the convention center's South Hall. Along with a ground-floor restaurant, a rooftop bar, and meeting and banquet space, the property would contain 1,024 hotel rooms operated by two different hotels, similar to the nearby JW Marriott and Ritz-Carlton. According to TriCal, it may take two to three years to receive City approval for the project, and an additional two years to develop the property.
Nearby, another megaproject is taking place, commonly referred to as Oceanwide Plaza. Along with an open-air, 166,000-square-foot retail area and 504 condominiums, a 184-key Park Hyatt is expected to be developed; the property would become the sixth location in the U.S. for the luxury brand. Located at Flower and 11th Streets, this project is anticipated to be completed in 2019.
Of all these projects, the Fig + Pico project will be the most significant in size. Still in the early development process, developer Lightstone Group plans to construct two buildings of 42 and 25 stories. The larger tower, to be located at the corner of Figueroa and Pico Boulevard, would contain 820 guestrooms split between two operators, as well as 11,000 square feet of commercial uses, rooftop pool decks, meeting space, and parking; the smaller tower, which would be located at the corner of Pico Boulevard and Flower Street, would contain 342 guestrooms, 2,145 square feet of ground-floor commercial space, and similar ancillary features. No operators or hotel brands have been announced for this project, and a timeline has not been confirmed; however, completion is reportedly aimed for 2022. Additionally, it was recently reported that the project has a $67.4-million feasibility gap in financing. The developers and the City are working on a deal that would provide $103 million in public money for the project, although this is considered speculative at this time.
Similarly, the L.A. City Center Project, which would contain a 300-room W Hotel, was recently approved after the developers submitted new plans for the $700-million development. This project has been rumored for years, with plans changing several times. The most recently approved plans feature two buildings; the 29-story structure would contain the hotel, while an adjacent 49-story building would house 435 condominiums. Additionally, the project would contain approximately 5,000 square feet of retail at the ground level. A final timeline for this project has not been approved.
These projects, as well as the remaining projects under construction and in the pipeline for Downtown Los Angeles, are listed and mapped out below. It is important to note that some of the projects, particularly those that are speculative, may never come to fruition, as many of them are still seeking financing or final approval from the City, which is often a lengthy process.
The Los Angeles Convention Center (LACC) is a significant demand generator for DTLA and is one of the key contributors to the economic and cultural vitality of Los Angeles. In recent years, the convention center has hosted several high-profile events, including events related to the Special Olympics in 2015. In addition, in April 2014, it was announced that the LACC was able to attract the U.S. Green Building Council conference away from the San Diego Convention Center, a major competitor of the LACC. This new conference, which was held in October 2016, attracted over 18,000 attendees.
Historically, the LACC has lost larger citywide conventions to other regional convention centers with more guestrooms within a walkable distance. This trend is set to change with the number of new DTLA hotel rooms coming online within a one- to two-mile radius, including the recently opened almost 900-room InterContinental Los Angeles Downtown.
In June 2015, the City Council approved the recommendation to move forward into contract negotiations with HMC Architects and Populous for the expansion of the LACC. However, this project is currently on hold, as AEG, which owns the Staples Center and L.A. LIVE and operates the LACC, may potentially take on the expansion project. Under this plan, AEG would likely develop a hotel, office space, a retail component, and more. According to convention center officials, the expansion plan would make the LACC more attractive for larger conventions, such as Comic-Con International, which has historically been held in San Diego. By size, the current facilities place the LACC near the bottom of major convention centers in the U.S.; however, with the proposed expansion, it would rise to the mid-range, just above Anaheim Convention Center's current offering of space.
Hotel Market Performance
Historically, the DTLA market has been driven by corporate and meeting/group demand, but leisure demand is expanding, with L.A. LIVE as the main catalyst, coupled with the openings of restaurants and nightlife venues. Local hoteliers report that the area has become a hub for tourists, with travelers opting to stay Downtown while exploring other parts of the greater Los Angeles market. The success of L.A. LIVE and the JW Marriott and Ritz-Carlton hotels has benefitted market-wide average rate (ADR) in DTLA. These hotels set a new bar given their luxury product offerings and brand affiliations at higher price points, helping to raise the market-wide average rate and spur renovation projects at other hotels.
DTLA has registered seven consecutive years of RevPAR increases. According to HVS surveys with market participants, our research, and interviews with DTLA hotel managers, in 2016, occupancy registered in the high 70s, with an ADR level averaging $220, and a RevPAR of approximately $175, an increase from the year prior and an all-time high. A minimal occupancy decline was registered in the year-to-date period through October 2017 because of the entrance of new hotel supply, particularly the InterContinental Los Angeles Downtown, although ADR reportedly increased 2% to 3% year-to-date. While illustrating an improvement for this market, these average rates still have room for growth before catching up with the average rates commanded by greater Los Angeles' top-tier markets, such as Santa Monica, West Hollywood, and Beverly Hills.
Investor appetite in DTLA has strengthened in recent years. Since 2014, over $500 million in assets have traded hands, representing nearly 23% of DTLA's total supply.
The DoubleTree by Hilton Los Angeles Downtown was purchased by the Chinese firm Han's Group USA for $115 million in June 2017, more than double the hotel's 2011 sales price. The ability to purchase existing, high-quality hotels with a proven track record in the burgeoning DTLA market is still an attractive option for investors, even with new supply on the horizon.
Slightly over a year after the Ace Hotel opened, it sold to public REIT Chesapeake Lodging Trust for $102 million, or $558,791 per key. The Ace represents the highest price-per-key transaction for investment purposes (non-redevelopment) to ever to take place in DTLA, illustrating that investors have confidence in the market's continued growth; the previous record was held by the Standard Hotel Downtown, which sold for $444,444 per key in 2008. Greenfield Partners paid $11 million for the historic United Artist building in 2011, which was subsequently converted to the Ace Hotel. The cost of the renovation was not disclosed. Chesapeake also owns the Hilton Checkers in DTLA.
After being converted from a Holiday Inn to the Luxe City Center Hotel in 2010, the hotel sold to Shenzhen Hazens Real Estate Group in July 2014 for redevelopment purposes. Although the sales price penciled out to $585,112 per room, the price included multiple adjacent parking lot parcels and, thus, was not a true per-key price figure. In September 2017, the City approved plans for a 300-room W Hotel Los Angeles on the site as part of the greater $700-million L.A. City Center project, which will include 435 condominiums, retail space, and subterranean parking.
The influx of people and development in Downtown Los Angeles has led to a notable increase in the supply pipeline, and the scope of the major mixed-use projects is expected to advance this phase of DTLA's renaissance. With the saturation of full-service and boutique hotels in DTLA, there may be opportunities to develop other hotel products, particularly those affiliated with nationally recognized hotel chains; no nationally recognized, branded, limited-service hotels currently exist in DTLA, atypical of downtown markets in other major U.S. cities. With the availability of developable land decreasing rapidly, adaptive reuse projects remain a viable option for the development of limited-service, select-service, and/or extended-stay hotels in the DTLA market.
Joining HVS in 2012, Jessica enjoys combining her real estate background, finance education, and passion for hospitality as a Consulting & Valuation Analyst at HVS Los Angeles. Specializing in upscale and luxury hotels in the Los Angeles area, she has appraised properties from Santa Monica to North Hollywood, as well as the remainder of California, Oregon, and Arizona.More from Jessica White
Greg Mendell, a member of the HVS Los Angeles office, executes hotel valuations and feasibility studies in markets throughout California and Arizona, including being one of the firm's experts on the Hollywood market. HVS leaders now live in and work from more than 30 markets throughout the North American region, including San Diego, LA, San Francisco, Portland, Seattle, Vancouver, Las Vegas, and Phoenix in the west.More from Greg Mendell
HVS is a leader in global hospitality financial consulting. Hotel owners, developers, investors, lenders, management companies, and public agencies around the world rely on HVS to make informed business decisions. HVS's commitment to excellence and unrivalled hospitality intelligence is delivered by more than 300 people in over 50 offices throughout the world who specialize in a wide range of hospitality assets including hotels, restaurants, casinos, shared ownership lodging, mixed-use developments, spas, and golf courses, as well as conventions, sports, and entertainment facilities. For more information about HVS visit https://hvs.com.