Last May, Lightstone Group started work on its $500 million, 755-key hotel project in Downtown Los Angeles, a dual-branded AC and Moxy.
One of the first steps was to pour a mat slab — a 12-hour continuous process to create a thick concrete plate that would serve as the 42-story building’s foundation.
The pandemic gave construction workers a hassle-free opportunity to do this. Given that Downtown was a ghost town, Lightstone could shut down lanes surrounding the site to accommodate 750 concrete trucks.
“The logistics of that in a non-Covid environment would have been really overwhelming,” said Mitchell Hochberg, president of Lightstone.
Lightstone was one of the few developers that actually managed to build a hotel in L.A. during the pandemic, a welcome exception in a sector that many had written off.
The secret? Don’t actually open while the pandemic is still raging, and lock down construction financing well beforehand.
In L.A. County, new hotel construction through June of this year was down 22 percent compared to last year, according to Atlas Hospitality Group, a hotel brokerage. In some cases, newly built hotels are ready, but they’re keeping their doors shut.
“They’re waiting for restrictions to be lifted,” said Alan Reay, president of Atlas Hospitality, so that when they open, they will actually have guests.
Until business and international travel bounce back, the city is unlikely to see a major influx of new hotels — especially ones asking less than $200 per night.
“Los Angeles is coming back, but we’ve got a long way to go before we get to pre-Covid levels,” said Raymond Martz, the CFO of Pebblebrook Hotel Trust, which owns properties such as the Hotel Palomar Los Angeles Beverly Hills and Le Méridien Delfina Santa Monica.
In 2020, Hollywood was set to get the third of what would be a mini-empire of hotels, all planned by Relevant Group. For years, the firm had planned to build more than 700 rooms across four hotels — the Dream Hollywood, the Tommie, the Thompson and the Selma hotels — all within a few blocks between Sunset and Hollywood boulevards.
But the Tommie never opened. Neither did the Thompson, which was set to open the previous year.
Construction costs and delays plagued both hotels. Now, the 190-key room Thompson is set to open in August, with the 212-room Tommie scheduled to open the following month.
Both hotels got a lifeline: $72 million in mezzanine financing to finish construction from Machine Investment Group, a New York-based investment firm founded last summer by Andy Kwon and Eric Rosenthal, former brokers at Garrison Investment Group.
“Main[stream] commercial lenders are still shying away from financing construction,” Reay said, mostly due to uncertainties around construction costs and the timeline for travel to rebound.
Hotels in resort markets such as San Diego might have an easier time obtaining financing, with interest rates of up to 3.5 percent, according to Martz. He’s still hopeful about L.A., though.
“There’s light at the end of the tunnel,” he said.
Lightstone hopes to open its hotel project, located at the corner of Figueroa Street and Pico Boulevard, in the fourth quarter of next year, according to Hochberg.
“We see a benefit in being one of the first openings post-Covid,” Hochberg said.
That’s not to say construction went off totally without a hitch. Delays at the Port of Los Angeles forced Lightstone to drive in some materials from Houston.
Martz says getting construction materials right now is nearly impossible. Pebblebrook completed renovations on its Le Parc hotel in West Hollywood earlier this year. Today, those renovations would cost up to 20 percent more, Martz said.
“Ordering your stuff now, good luck with that,” he said. “It’s going to be months and months longer, which adds to the cost.”
Even paint can take up to 12 weeks to be delivered now, Reay said.
“Unless you’re already under construction, we’re probably not going to see a lot of new projects start,” he added.
L.A. is still waiting for business and international tourism to bounce back, with Lightstone predicting a full comeback only by the end of 2022. Until then, hotels have to rely on leisure guests, who often book weekend trips or staycations.
Not just luxe
Not only will there be a lack of new construction of budget hotels across L.A., but supply is also being taken off the market, according to Reay. L.A. County has bought a number of budget hotels over the past year, including six Motel 6 hotels, a Travel Plaza Inn and a Willow Tree Inn, for Project Homekey — a state effort to provide permanent housing to the homeless.
Other budget hotels across the county have been bought and converted into affordable housing and low-income apartments.
“There’s a lack of economy sector hotels,” Reay said.
In the first half of this year, eight hotels opened in Los Angeles, none of which could be classified as budget. The largest was a 288-room Courtyard by Marriott in Monterey Park, developed by Juan Aquinde at Ethan Capital.
Another reason for L.A.’s low supply of budget hotels is that it has simply become too costly to build.
A three-story hotel building with grade-level parking — underground parking is significantly more expensive — now costs$200,000 per room to build due to the rising cost of lumber and other materials during the pandemic, Reay said. And that’s not even taking furniture into account.
Hotels will have to charge $200 per room to make up for these costs, Reay added.
In West Hollywood, new hotels face more than rising construction costs and lagging demand.
Last month, the West Hollywood City Council passed new regulations limiting how many rooms workers can clean and requiring hotels to add training for harassment, as well as install security devices like panic buttons.
Hospitality unions like Unite Here — which pushed for the measures — say new worker health and safety policies like this are even more important now, in light of the pandemic.
“Hotels have looked to take advantage of crises to cut labor costs and increase workloads,” said Kurt Petersen, the co-president of Unite Here’s Local 11 chapter, which represents more than 32,000 hotel and entertainment workers throughout Southern California and Arizona.
Hotel owners and associations disagree.
“The losers will be the employees,” Pebblebrook’s Martz said, adding that the new regulations will increase costs and hotels will have to combine positions and cut down on labor. “We aren’t flush with cash right now,” he said.
But West Hollywood doesn’t see the new regulations that way.
“Reports of a hotel apocalypse are unfounded,” West Hollywood Mayor Lindsey Horvath said, citing testimony from a council member in Santa Monica, where similar regulations have been passed. “We’re just saying recovery in West Hollywood is for all.”