One commercial real estate sector that GRS Group hasn’t touched on recently in this space is hospitality. Bob Sonnenblick, chairman of Sonnenblick Development LLC, recently filled us in on the current hotel trends, and he had plenty of good news to share. Development is back, core markets are hot and fundamentals are in good shape. Sonnenblick shared what he thinks are the hotel sector’s bright spots.
We hear a lot about multifamily and its boom. What is going on with the hospitality sector right now?
There’s no question that the apartment industry is the darling of the real estate business right now. Every investor, pension fund or builder is actively looking for apartments. But as a result, there has been huge competition in the apartment sector, and it’s taken away most of the profitability of being in that sector. It’s become a very hard and competitive business now.
The exact opposite is the case in the hotel business, where there are very few hotel developers still standing as a result of the previous recession from 2008 to 2012, when most of them all got wiped out. It’s actually a very good time to be a hotel developer right now.
Most importantly, hotel operations are at an all time high this year. Tourism in Los Angeles County just broke a record for the largest dollar volume of tourism ever. The actual business side of our industry is very strong.
What kind of development is happening?
The limited-service hotels, the ones without food and beverage components, like Hilton Garden Inn, Hyatt Place and Courtyard by Marriott, the real select-services are on fire. Those are the ones that are getting built around the country right now. There is very little construction of full-service, high-rise, four-star and five-star hotels.
What is driving this?
It is a very simple concept. The profit margins on the rooms component of a hotel are very high. The profit margins on the food and beverage components are very low. So people are building hotels now with only rooms in them and nothing else. The customer is OK with that. They’ll take a nice room and walk across the street to a restaurant.
There’s clearly an increase in spending that’s happened over the last year. Operations and profitability are up about seven percent this year alone, which is a huge jump. But these select-service hotels are generally equivalent rooms to the full-service hotels, but they’re priced 30 percent lower. The customer loves it.
How is business travel holding up?
Business travel is back up to the levels we had seven years ago. That part is all really good, and next year it will be even higher. In general, the outlook for the hotel industry is a very strong future over the next two or three years with very limited new supply.
Are there any parts of the country doing particularly well?
There are two parts of the country that are very strong, and not surprisingly, it’s the two coasts. The New York-Washington D.C.-Boston market is unbelievably strong. The L.A.-San Francisco combo-market is very strong. The third market that is equally strong is Miami and South Florida. The coastal markets are having phenomenal years. The middle of the country is fairly flat.
Are there any hotel projects you have on tap that you’d like to highlight?
We’ve got two projects in California that we are very excited about. The first one is the building of a $75-million hotel on the campus of the University of Southern California Medical Center, surrounded by four hospitals and three medical schools. it’s a very exciting project for us. And we’re doing a 137-room hotel inside the new terminal at Sacramento International Airport. Any time you build a hotel attached to the airport terminal, it gives you a big leg up on getting really good occupancy.
We are also actively looking for more sites around Southern California that are located near and attached to major hospital projects.
Do you see anything derailing this momentum?
Unless it’s some kind of wild international act of terrorism, other than that, I really see us having a pretty good two-to-three-year run in front of us before you see interest rates start going back up.