California hotel development reached its lowest point in about 10 years in 2024.
Atlas Hospitality Group’s California Hotel Development Survey 2024 Year-End found 35 hotels opened last year, a 34% year-over-year drop in hotel openings, with 3,798 rooms. The largest hotel to open was the 197-room Chicken Ranch Casino Resort in Jamestown, followed by a tie at second place with the AC Hotel Sacramento and SpringHill Suites Chula Vista Eastlake, both with 179 rooms.
The last time the number of California hotels and rooms opened was lower was in 2014, when 26 hotels opened with 3,191 rooms. The years leading up to 2014 were lower as well due to recovery from the Great Recession.
In recent years, hotel openings peaked in 2019 with 92 hotels, bringing in 11,795 rooms. Rooms openings hit their high in 2021 with 12,027 rooms in 88 hotels, but that was due in part to hotel openings that were delayed from 2020 because of the pandemic.
Interest rates are high, lenders have pulled back and investors can buy an existing hotel below replacement cost, Atlas Hospitality President Alan Reay said.
“That’s because replacement cost is up substantially because of inflation, labor, insurance and everything else,” he said.
When looking at building a new hotel in California that’s three or four stories tall, not even taking into account any subterranean parking, that could be $250,000 to $300,000 per key just for the construction cost, he said. There’s also the need to purchase land.
“It just economically doesn’t pencil, and that’s why banks are not really bullish on it, and that’s why investors are looking more to buying existing product,” he said.
As of year’s end, California had 124 hotels under construction with 16,468 rooms. There were 1,186 hotels with 153,560 rooms in the planning stage.
That under construction number includes hotels that broke ground and have been under construction, even if the projects have since been stalled or seemingly abandoned, Reay said. For example, the only hotel project in San Francisco, the Waldorf Astoria, broke ground and has had all construction stopped. The 250-key Indigo Hotel in Coachella went through bankruptcy and hasn’t seen further work in the past two years.
To see a turnaround in the development environment, there would need to be a number of changes, Reay said. There would have to be a spike in operating numbers, namely revenue per available room exceeding the consumer price index, interest rates coming down and the cost of operations decreasing.
“It’s becoming very, very difficult, so I think that in the near term, outside of coastal locations or very prime markets, we’re just not going to see new development coming back, and that’s probably in the next 24 to 36 months,” he said.
Developers and investors who otherwise would be interested in California are looking elsewhere, he said.
“I talked to someone recently that built a hotel in the Caribbean, and they were telling me how quickly and easy and the cost and rates were compared to what they were getting in California,” he said. “I think you’re going to start seeing that happen a lot more.”