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HOTEL OUTLOOK

The hotel boom is likely to last at least through 2008.

That was the word at the recent “Meet the Money” conference in Los Angeles, a yearly gathering that brings together lenders and hotel companies.

About two dozen Orange County companies were represented at the conference, put on by Century City law firm Jeffer, Mangels, Butler & Marmaro LLP.

They included hotel owners Sunstone Hotel Investors Inc. of San Clemente, Newport Beach-based Makar Properties LLC and Tarsadia Hotels, also of Newport Beach. Local financiers, real estate developers, architects and law firms also were on hand.

The attendee mood was upbeat,a stark contrast from the somber days of 2002.


Money To Be Had

Investors by and large indicated there is money to be had for hotel investment, much of it from private equity funds.

“We’re bullish on the hotel sector,” said Alan Miyasaki of New York-based Blackstone Group.

Private equity firm Blackstone invested $13 billion in hotels in the past 18 months, becoming the world’s largest hotel owner.

Things are going so well for hotels that it’s complicating some deals, said Bob Kaplan, senior vice president of Colliers International Hotels in Irvine, part of real estate brokerage Colliers International Inc.

Occupancy and room rates are going up so fast that in the time it takes for a loan to close, a buyer already might have a lower debt ratio than when the papers were signed, Kaplan said.

Another sign that hotels are the darlings of investors: Lenders aren’t as picky about what brand name a hotel might carry before finalizing a deal.

“There was a time that investors demanded a brand to get funding,” said Paula Pfleuger, a panel moderator from the global hospitality practice at Pricewater-houseCoopers LLP in Los Angeles.

Demand for hotel rooms is at its highest in 15 years, said market tracker Smith Travel Research of Hendersonville, Tenn.

By the end of this year, about 80% of the country’s hotel markets should reach peak daily rate levels, according to PKF Consulting’s Hospitality Research Group.

“We’re outperforming historic levels,” said Mark Woodworth, executive vice president of PFK Consulting in Atlanta.

The surging market has driven hotel sales to a feverish pitch in the past year, with no end in sight.

According to a recent survey by the Lodging Industry Investment Council, 85% of those who bought hotels in the past two years say the hotels are performing at or above their expectations.

And with investors high on the sector, prices for hotels are reaching highs.

“2005 sales volume in California reached $4.5 billion,” said Alan Reay, president of Irvine-based Atlas Hospitality Group.


Placing Bets

In some cases, sales prices haven’t always been justified by performance.

“Buyers are purchasing a future income stream,” Reay said.

Last month’s sale of the Ritz-Carlton Laguna Niguel for $330 million (or $861,000 per room) generated a buzz at the conference.

The price commanded by the Ritz-Carlton might inspire other owners to wonder what their hotels are worth, Reay said.

Fueling the fire: a lack of construction.

Nationally, the number of hotel rooms has grown 2.2% in the past 15 years, according to Smith Travel. For the first quarter of 2006, the national growth rate was 0.3%.

Only Washington, D.C., and San Diego grew more than 1%.

The pipeline for 2006 is weak at best.

As of March, 111,456 rooms were under construction nationwide. Thirty percent of those were midscale hotels without restaurants, say a Hampton Inn or Comfort Inn.

Midscale and upscale hotels such as Crowne Plaza or Courtyard by Marriott have shown the highest growth rates in the past year.

The only full-service hotel to open in OC in the past year was the Doubletree Guest Suites in Anaheim.

“We should be building, but we’re not because of high construction costs,” said Bruce Baltin, senior vice president of PKF Consulting in Los Angeles.

Still, development is on the horizon nationally with 226,000 rooms in some phase of planning.

Tarsadia Hotels is looking to develop, said Greg Casserly, the company’s president.

Tarsadia already has about $600 million of development in the works, he said.

“It’s an opportunity to buy distressed assets we can redevelop,” Casserly said.

The conference’s upbeat talk was tempered by historical trends in the industry.

The hotel business typically runs in 10-year growth cycles that inevitably end in another downturn, presenters said.

“Money flows where you get good returns, but when the market takes a turn, (private equity funds) are the first ones to turn away,” Colliers’ Kaplan said.

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