Los Angeles' recent legislation is creating significant obstacles for hotel developers, leading many to seek opportunities outside the city. This new regulation mandates the replacement of any residential units lost due to hotel construction, adding to an already challenging business environment in Los Angeles.
Passed in December by the Los Angeles City Council, the Responsible Hotels Ordinance aims to preserve affordable housing by enforcing a one-to-one replacement policy for housing units displaced by hotel projects. This law emerged from negotiations between the council and Unite Here Local 11, a labor union representing hospitality workers. Originally, Unite Here proposed a ballot initiative requiring hotels to offer vacant rooms to homeless individuals, but the ordinance replaced this with a voluntary system for hotels to report available rooms for temporary housing.
Hotel developers, already hesitant about investing in Los Angeles, find this new requirement another reason to look elsewhere. Alan Reay, president of Atlas Hospitality Group, noted a significant decline in interest, stating that this law further discourages investment in the city's hotel sector.
Despite these challenges, Los Angeles' hotel market remains robust. Data from CoStar reveals growth in occupancy, average daily rate, and revenue per available room. Nevertheless, the city's complex regulatory environment, including a recent "mansion tax" on high-value property sales, is complicating the financial viability of new hotel developments.
The mansion tax, implemented in April 2023, imposes a 4% tax on property sales above $5 million and 5.5% for sales over $10 million. Funds from this tax are earmarked for affordable housing initiatives. However, since its introduction, only a few hotel transactions have occurred in Los Angeles, indicating a cooling market.
Developers face a slew of challenges, including high leverage ratios, increased taxes, and lengthy permitting processes. According to Emmy Hise, senior director of hospitality analytics at CoStar, these factors, combined with new ordinances, make hotel development in Los Angeles increasingly difficult.
As a result, developers are exploring opportunities in neighboring areas and other states. Bob Olson, president and CEO of RD Olson Development, shared his experience of navigating through various challenges, including union negotiations and local regulations, which ultimately led his company to sell a proposed hotel site in Hollywood. He noted that while he remains committed to California, his company is actively seeking development opportunities in states like Arizona, Texas, and Nevada, where market conditions are more favorable.
In summary, while Los Angeles remains a stable hotel market, the new housing law and other regulatory hurdles are pushing developers to reconsider their investment strategies, both within and outside of California.
Source: CoStar
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