LOS ANGELES — Hotel executives say the calculations they make when looking at a potential market for investment are relying less on supply-demand dynamics and more on "political considerations."
Ten Five Hospitality Managing Partner Dan Daley said that's becoming a bigger focus for him.
"The political considerations for any city that we look at have become more and more salient to the overall discussion," he said. "Not to get in trouble with the City Council of [Los Angeles], but you look at the City of LA and the ability to transact here and the sort of changing winds and changing tides, and you're almost at the mercy of City Council on how it's constructed in any given year."
Daley spoke during the "Executive Suite Strategies" session at the 2024 Meet the Money conference. He said his company has tried to look at markets more holistically.
"It's the underlying fundamentals of a city, what's the spirit of the city, what's the energy of the city," Daley said. "What's their creativity and the culture we think we can build a really interesting story around and add something to."
He said existing supply is actually pretty low on the list of considerations in a market.
"The philosophy is more about can you create a great product and execute what I'm trying to do really well that's going to resonate at the end of the day," he said.
Matt Marquis, CEO of Pacific Hotels, said he similarly looks for the right "energy" felt in a market, and noted downtown Los Angeles had that energy just before the COVID-19 pandemic hit. It's gotten more difficult to invest there since then, however, because of changes in regulation.
"What's happened is you really do need to watch that government — whether you want to call it uprising or change — whatever it is that changes in government," he said. "There's a lot of problems in LA that go back to leadership in the city versus any economics because I have hotels on the west side that are doing just fine."
Greg Friedman, managing principal and CEO of Peachtree Group, said problems arise when everyone wants to buy in the same limited number of markets, which drives up pricing considerably.
"Then there are markets like Minneapolis where I feel like everything is on sale and the basis is theoretically just ridiculously low, but the markets haven't fully recovered from COVID and have a lot of political headwinds that you're dealing with," he said. "Whether it's Minneapolis, Portland or San Francisco, it's sort of interesting. You feel long term they should be OK, but then you're taking on that duration risk. And as a lender, it's hard to take on that risk."
He said from a pure demographics perspective, Nashville and various cities in Texas continue to see a positive "migration story."
"That's why we like those markets versus trying to pick up something in some other market where you're buying something super cheap but get political headwinds," Friedman said.
Bruce Lowrey, managing director of investments at CIM Group, said he looks at markets in the North and South U.S. completely differently because of continued outperformance in the South.
He said there are some Northern markets with "green shoots," including Detroit, but he cautioned investors to look closely at any market they're interested in.
"I think it's very important that investors are looking at if they're getting a huge discount because they're coming into a distressed environment or are you following the trend of strong performance?" he said.
