Marcus & Millichap

California Hospitality Investment Forecast

State of California, 2017 Outlook

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Supply Wave Finally Hits California, Posing New Considerations for Investors

Key performance measures moderating. An influx of new rooms comes to the Golden State in 2017, marking the most significant phase of supply growth this cycle. Although annual occupancy will flatten this year and ADR and RevPAR rates of increase will also moderate in response to the new supply, the state’s long-term outlook remains sound barring an unanticipated shock to travel. The addition of thousands of upper midscale and upscale rooms could ultimately induce new demand from travelers previously locked out by a lack of moderately priced accommodations, especially in major metros. The emergence of new room demand would partly counter a trend of slowing economic growth statewide. A dwindling labor supply and the high cost of housing impose a potential obstacle to the state achieving a higher rate of near-term economic growth. Potentially more stringent immigration policies may also deprive employers from acquiring the workers they require to fulfill expansion goals.

Slowing RevPAR growth will affect pricing. Investors resisted higher asking prices to drive a decrease in deal flow over the past 12 months, while sales of smaller properties contributed to a decline in dollar volume. Acquisition debt remains accessible and equity is available, but completing deals during 2017 will depend partly on sellers’ willingness to meet investors’ changing expectations. In addition to higher interest rates that affect borrowing costs, investors continue to underwrite for slower near-term RevPAR growth as the current cycle matures. Statewide, RevPAR growth has waned from more than 10 percent in 2014 to 6.6 percent last year, and little capacity remains to appreciably raise occupancy. Investors also continue to seek modestly priced properties offering potential upsides, rather than full-price performing assets where NOIs have risen on the overall strengthening trend in the market. Potential upside plays include rebranding or developing new sources of room demand.

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