Hotel Construction Slows Down as Pool of Financing Dries Up

Despite a rise in room rates and an abundance of overnight guests, hotel developers are putting the brakes on construction in Southern California, at least for the next year or two, analysts say, as stricter lending guidelines and a dwindling pool of financing hamper builders from carrying out their plans.

Development of at least 45 projects, from small motels to luxury resorts, had been announced in Los Angeles and Orange counties, but many of those won’t get built, analysts say.

“A lot are falling by the wayside,” said Bruce Baltin of PKF Consulting in Los Angeles. “There’s less financing available, and what is available is on more stringent terms.”

Host Marriott, Homestead Village, Extended Stay America, Prime Hospitality and other big hotel chains have pulled out of land purchases and scaled back development plans as the national economy has slowed, hotel stocks have plunged and conduit lenders, who pool loans and issue securities against them, have stopped making loans. Executives say the financing shortage is not a reflection of the industry’s health but of general economic uncertainty.

“Our properties’ occupancy continues to be very strong,” said Mike Wilson, vice president of marketing for Extended Stay. “There’s just no capital available.”

Southern California hotel occupancy is healthy, averaging 76% in Los Angeles County and 71.4% in Orange County for the first nine months of the year. Room rates have climbed 8.6% since September 1997 to an average of $108.61 in Los Angeles County and 7.5% to $99.95 in Orange County. Extended Stay officials say they are committed to expanding in certain markets, including Southern California, although brokers say the company has dropped out of escrow on several deals. Extended Stay does have six Southern California projects that have already received financing and are under construction.

In the future, Wilson said, Extended Stay must use internal cash flow to fund new projects. It is renegotiating deals with several land sellers. Across the country, it has slashed the number of hotels it will build next year in half to 60.

“What we are trying to do is not stop building completely,” Wilson said. “We are trying to keep a pipeline of development going.”

Hotel construction, which peaked here in the late 1980s, got a fresh infusion just over a year ago, fueled by new-job growth, rising room rates and a shortage of rooms in certain areas, analysts say. Hotel chains were snapping up sites as quickly as they could find them. Some were so confident they even tied up several sites in the same community.

Fueling all of this development were stock offerings, large credit lines and profits from rising room rents. According to PKF, from 1992 to the end of this year, hotel profits per unit doubled, mainly because of the 36.4% jump in room rents nationwide during that period--a rate twice the pace of inflation during the same period.

But when hotel shares began plunging and commercial lenders began backing out of commitments about two months ago, everything changed.

In Hawthorne, two land deals, involving two Marriott hotels and an Extended Stay hotel, fell out of escrow. Both hotel chains forfeited large deposits, brokers say.

In Pasadena, Burbank and Glendale, eight new projects have been announced. Analysts say they know with certainty of only one going forward. Other projects in Orange County have been pushed back a year, as developers and lenders watch the market and wait for financing to return.

“There was a short window when deals were closing and prices were going nuts. The sellers who held out missed the boat,” said Bill Peters, an executive vice president with CB Richard Ellis Group in Torrance.

Not all projects are likely to get the ax, analysts say. Developers of several projects associated with the Disneyland expansion in Anaheim and hotels across from the Los Angeles Convention Center and Staples Center could get approvals from lenders and get started in the next year or two, analysts say.

Plans are being drafted for a 1,500-room convention-center hotel and a 300-room luxury hotel on property the Community Redevelopment Agency is acquiring near the new sports facility. Financing has not yet been lined up, and construction is unlikely to begin until 2000, said developer Ed Roski Jr. of Majestic Realty.

That’s also when lodging analysts expect the cooling national market to begin warming up again.

“Lodging typically suffers more than other industries when the economy declines,” said PKF analyst R. Mark Woodworth. “However, I believe that if you can ride out the next two years, you will be in a prime position to reap the rewards associated with the expected industry rebound into the next millennium.”