California Lodging & Investment Conference | Takeaways

Key Highlights

• RevPAR grew 4% to 5% YOY
• Operating expenses grew 7% to 9% YOY due to labor costs and property insurance premiums

Overview

The sentiment is that without federal intervention to enact a policy to halt property insurance premiums, the cost of operating a hotel in California will exceed revenue growth, hindering profitability and devaluing hotelier’s equity in their properties. Several panelists, including KP Patel, joked that California is beyond fixing and that they should “run.” Ironically, for a conference aimed at luring hotel investment into the state via the dynamic culture and economy of California, the overall sentiment from actual hoteliers was negative. Investors relayed looking out-of-state for higher yields, sometimes operated passively by 3rd party management, as deals “just don’t make sense in California” due to policy issues.

Others advocated that California, as the world’s 5th largest economy by GDP, “sets a precedent” for labor laws in other states and that “running” from the problem of selling and relocating out-of-state may help the individual hotelier.

These unexpected increases in operating expenses, coupled with the fact that many owners have upcoming PIP requirements or expensive loans, is enough to call it quits. This will lead to an increase in hotel market inventory and a decrease in purchase prices as pricing softens and supply increases.

The hospitality industry nationwide is expected to eventually meet the same problems California lodging is experiencing with rising labor costs, shortage of labor, and increasing property insurance premiums.

One operator was more optimistic, stating that by “treating employees right,” they won’t quit or seek a higher paying job elsewhere. The operator shared this sentiment despite the Fast Act becoming effective, in which California fast food employees will earn a minimum of $20/hour.

Solution

For these reasons, we strongly encourage owners to understand how much equity they have in their hotel so that they can proactively plan for the future or have a retirement plan in place to either sell, lease, or 1031 exchange the equity in their property into a passive, income-producing property such a triple-net (NNN) investment where tenants are responsible for all operating expenses.