LA law creates new hurdles for hotel developers

Hotel developers in Los Angeles must now replace homes demolished for hospitality suites.

The City Council passed a law early last month requiring new hotel projects to replace displaced housing units on a one-for-one basis, Hotel News Now reported via CoStar News.

The Responsible Hotels Ordinance favors affordable housing over new hotel developments. The legislation was a compromise between the council and Unite Here Local 11, a labor union advocating for affordable housing. 

As part of the compromise, the council rescinded a March 2024 ballot initiative supported by Unite Here that would have required hotels to make vacant rooms available to homeless residents.

Instead, the new ordinance establishes a voluntary registry for hotels to notify the city about vacant rooms available for use as interim housing.

Having to replace housing units is a deterrent for hotel developers, whose interest in building in Los Angeles had already ebbed. Alan Reay, president of consulting firm Atlas Hospitality Group, said it adds another obstacle, making it more challenging for developers to consider new projects in L.A.

“When we’re talking about the city of Los Angeles, it was already down to zero, and now this is minus,” Reay, whose Newport Beach-based Atlas Hospitality focuses on statewide hotel deals, told Hotel News Now.

Last year, Los Angeles County was the state’s relative bright spot, with nine new hotels opened and 1,370 new rooms, according to The Real Deal. The county tops projections with 225 hotels and 33,372 rooms planned. 

Despite a challenging environment for developers, the Los Angeles hospitality market has shown solid performance. 

CoStar figures for December indicate year-to-date growth in occupancy, average daily rate and revenue per available room. The 12-month average daily rate was $198, while revenue per available room was $142, each near historical highs. 

The 12-month average occupancy through December was 71.7 percent.

As of early this month, Los Angeles had two hotels under construction with eight in final planning, plus 21 in the pipeline, according to CoStar. Eight projects are listed as deferred.

Recent laws targeting real estate, including the Measure ULA “mansion tax” on residential and commercial property sales exceeding $5 million, pose financial obstacles for developers.

Last year, four of the 30 hotel deals in the L.A. market were priced at more than $20 million, according to CoStar. Since the mansion tax went into effect in April, only four hotels have traded in L.A. including three for planned hotel-to-home conversions exempt from the tax. The fourth was for $3 million.

Emmy Hise, senior director of hospitality analytics at CoStar, described the Los Angeles hotel market as “stabilized.” While local hotels are set to host major events such as the Super Bowl in 2027 and the Olympic Summer Games in 2028, the new ordinance adds uncertainty for hotel builders.

“It’s already a difficult time to underwrite and get things to pencil,” Hise told Hotel News Now.

Developers are reportedly exploring alternative locations within California and the U.S. with fewer obstacles.

Hotel owners may benefit from high barriers to entry, enjoying improved revenues and profits due to limited new construction. 

However, the cumulative impact of various regulations poses significant challenges for developers, leading some to explore opportunities in states such as Arizona, Texas and Nevada, where demand and revenue per available room are rising.

— Dana Bartholomew

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