The Real Deal Los Angeles

Butler: Caution in hospitality industry will affect hotel development in LA

Jim Butler says Wall Street’s expectations of growth are unrealistic

February 11, 2016 04:35PM
By Hannah Miet

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Jim Butler Wall Street

Jim Butler of Jeffer Mangels Butler & Mitchell

A tone of caution in the hospitality industry will affect development nationally, said Jim Butler, the chairman of the global hospitality group at Century City-based Jeffer Mangels Butler & Mitchell. It will even affect Los Angeles, a market long-starved for rooms that has recently seen hotel development soar, with at least 80 new projects in the pipeline.

Butler said the tone at the Americas Lodging Investment Summit (ALIS), held Downtown last month at the J.W. Marriott, was far from optimistic.

“It was the first time since we started coming out of the recession that there was a note of caution, with people looking to the downside,” Butler said of the largest hospitality conference in the world. “The reality is that it’s different in L.A. Until the current boom, we had less inventory than any major market. But Wall Street is looking at New York’s hotel industry to determine funding for REITs who would be potential buyers in L.A. New York’s hotel market is anemic, so that will impact development here.”

Nationally, the industry predicts 4 percent growth in revenue per available room (RevPAR) this year, which is less than the 5 to 8 percent growth rates seen over the last several years. Wall Street has reacted to what it sees as a slowdown, leading to a downturn in the price of hotel REIT and C-corp stocks, some of which have decreased in value by 40 or 50 percent from a year ago, Butler said.

“When you go back to the great recession, the hotel industry fell off a cliff,” Butler said. “Coming out of it, for several years in a row, hotel RevPAR growth in many markets exceeded the 5 percent or 6 percent records, but the industry was hitting those records because it took a lot of increases to get back to where were. Now that we are at peak levels, those rates are slowing a bit…and it’s freaking out Wall Street investors.”

The result is that hotel REITs, which have made up 50 to 60 percent of hotel volume in the last five years, have less access to cheap capital and are stepping to the sidelines as buyers, Butler said.

While it may seem logical that smaller buyers would swoop in with the REITS out of the way, Butler said it is more likely that all investors will be cautious when they see things slowing down.

“What happens to (hotel prices) when more than 50 percent of buyer interest has disappeared?” Butler said. “It’s gotta at least have a cooling effect. People are discussing whether or not the party is over.”

While there is high demand for hotel rooms in LA — which saw a 9.3 percent increase in RevPAR in 2015, according to STR  — Butler said the county is still highly affected by the overall climate in the industry.

“The idea that the sky is falling is an infectious disease,” he said.

Butler said a lot of fear is also tied to Airbnb’s emergence as a competitor. According to a study by CBRE Hotels’ Americas Research, travelers spent $2.4 billion on Airbnb crashpads from October 2014 to September 2015. More than 55 percent of those dollars were spent in five U.S. cities, New York and Los Angeles among them.

Ironically, Butler said, the caution is coming after a year where the hospitality industry saw a 6.3 percent increase in RevPAR. While that marked a slowdown from the 8.3 percent increase seen in 2014, it reflected room rates that rose 4.4 percent, to $120 a night, and an occupancy rate that advanced 1.2 percentage points, to 65.6 percent nationally.

“I believe that fundamentals for the hotel industry are solid and very positive,” Butler said. “It does seem ironic that unrealistic…expectations of Wall Street should precipitate a downturn in the hotel industry, but that is a possibility.”