SAN DIEGO -- Even as hotel development in Southern California reached a new high last year, with more than 16,000 rooms under construction, the outlook for the future is not nearly as bullish as in years past.
In all, some 112 hotels accounting for 16,700 rooms were in various stages of construction by the end of 2018 -- a 28 percent increase over 2017, according to new data released Tuesday by Orange County-based Atlas Hospitality Group.
While the number of hotel rooms being built in San Diego County -- 2,458 -- was down slightly compared to 2017, the growth in construction activity for Los Angeles and Orange counties was far more robust.
In Los Angeles, more than 6,700 rooms were under construction -- an increase of 26 percent -- while in Orange County, the number of rooms under construction -- 3,128 -- surged nearly 90 percent.
Most of the Orange County hotels are in Anaheim, led by the 613-room Westin Anaheim Resort. The Anaheim building boom is likely fueled by the recently completed expansion of the city's convention center and Disneyland's longstanding -- and much anticipated -- plans for a new Star Wars land, which will open this summer.
While all that construction activity portends a record-breaking number of hotel openings in 2019, future development is likely to slow as lenders grow more squeamish about financing new projects during what appears to be the peak of the market cycle for lodging, say analysts.
"Lenders are more cautious and somewhat concerned about new supply coming into the marketplace, and for larger, full-service hotels they are requiring more equity from the developers," said Atlas CEO Alan Reay.
"Secondly, the cost of construction, including the cost of raw materials and labor, has skyrocketed. One of the negatives of a very strong economy is the labor pool is very small in terms of finding people to work on your project so contractors are bidding high to find labor. If you're not out of the ground today, I think it's going to be a tough situation."
In Southern California, Atlas says there are more than 90,000 hotel rooms in various stages of planning, including more than 17,000 in San Diego County, but it's likely that only a fraction of those will ultimately move forward.
Cisterra, a San Diego-based developer, has long had plans to build a Ritz Carlton in downtown San Diego, but the $450 million project, which also includes office space, housing and a gourmet market, was delayed by a union-backed legal challenge. That litigation, though, has been settled, and Cisterra has now been trying to land financing.
Cisterra Project Principal Jason Wood said Tuesday that he is optimistic about securing financing by the end of this quarter.
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While San Diego County trailed Los Angeles and Orange counties in the new construction category, it led Southern California in terms of the percent increase in hotel openings last year.
It also boasted the largest hotel opening -- the 400-room InterContinental downtown -- which was among 1,224 hotel rooms that opened in the county in 2018. That's a 48 percent increase over 2017. All other Southern California counties saw a decline in the total number of hotel rooms that debuted in 2018, Atlas reported.
Like Reay, San Diego real estate economist Nathan Moeder is seeing signs of a cooling market for new hotel development.
"Last year, there were a lot of hotel completions and beginnings because the projects were already financed but halfway through the year, the capital markets started to change because they know we're nearing the peak of the cycle," said Moeder, a principal with London Moeder Advisors. "And when that happens, lenders and equity groups are a little more timid and cautious about financing new projects."
He offers a caveat, though, for what he says are high-caliber projects like Cisterra's Ritz Carlton development, located near both Petco Park and the Gaslamp Quarter.
"If you're in the best location with the best operator, you probably have a better chance at being financed," he said. "In general, you'll have to come up with more equity because the banks are not going to be as interested in putting in a lot of debt. They'll say we want to limit our exposure, and so you, Mr. Developer, you have to put in more equity, and that's where the deals far apart."
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