AAAAAAAAAAA GHN Market Report: Orange County Rob Masi Senior Manager Transaction Real Estate Advisory Services Ernst & Young LLP MJ Kim Analyst Ernst & Young LLP Sponsored by: AAAAAAAA Building upon the recovery observed in recent years, Orange County’s lodging market experienced strong fundamental growth in 2013 and emerged as one of the best performing lodging markets in the U.S. in 2013. Improvements in the local economy, visitation, visitor spending and hotel demand, coupled with limited additions to supply, pushed Orange County’s hotel fundamental growth to levels exceeding the U.S., California and other major Southern California markets. Moreover, key local projects completed in 2011 and 2012, including Disney’s Cars Land and the renovated Anaheim Convention Center, have generated greater demand for lodging accommodations. Although the supply pipeline is growing in selected submarkets such as Anaheim and Irvine, Orange County’s hotel performance is anticipated to continue improving in 2014. Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 1 AAAAAAAAAAA Lodging performance After returning to pre-recession peak levels in 2012, Orange County’s lodging market continued to experience significant growth in 2013. According to PKF Consulting USA, LLC, Orange County’s hotel RevPAR increased by 8.4% to $122 in 2013, exceeding growth levels observed for the U.S. and other major Southern California markets. According to Smith Travel Research, U.S. hotel RevPAR increased 5.4% in 2013, while Los Angeles and San Diego RevPAR increased by 6.8% and 4.2%, respectively. Moreover, Orange County’s 2013 RevPAR growth added to the market’s strong performance in 2012, when RevPAR increased by 8.8%. Given strong occupancy rates observed across key Orange County submarkets in 2013–including Anaheim, Costa Mesa, Orange County Airport, North Orange County, South Orange County, Newport Beach and Huntington Beach–the increase in RevPAR was primarily driven by improvements in ADR, suggesting that hoteliers have regained pricing power. In 2013, OC’s overall ADR increased 5.7% to $159, while average occupancy increased 2.5% to 76.6%. Furthermore, given relatively high occupancy levels experienced across OC in 2013, the majority of near-term RevPAR growth is anticipated to continue to be driven by ADR gains. Orange County’s Costa Mesa submarket exhibited the strongest RevPAR growth in 2013 (10.9%) followed by the Newport Beach submarket (9.4%). However, all submarkets in Orange County exhibited RevPAR growth greater than the national average. Source: PKF Consulting USA, LLC Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 2 AAAAAAAAAAA The strong lodging performance can be attributed to a number of factors, including the success of the key local projects completed in 2011 and 2012. Disney revamped its California Adventure Theme Park with the new Cars Land in June 2012, and the new attraction has contributed to the park’s record attendance, revenue and profitability, as well as increasing leisure visitation to Orange County. Furthermore, the recent addition of the 100,000 square foot Grand Plaza at the Anaheim Convention Center (ACC) helped improve the performance of the West Coast’s largest convention center. In addition to the above-mentioned items, the following factors contributed to Orange County’s fundamental growth in 2013: • Recovering convention and group business – Although group demand struggled to recover following the economic downturn, the recovery of group demand throughout Orange County and, specifically, key convention destinations such as Anaheim played an important role in the OC lodging market’s growth in 2013. According to Anaheim Orange County Visitor & Convention Bureau, approximately 1.2 million people travelled to Orange County to attend conferences. Moreover, companies and attendees spent approximately $940 million on the conventions, which represents significant 9.9% of total visitor spending in OC.1 The strong growth in OC’s convention and group sector is expected to continue in 2014, keeping with the growth expected in convention and group demand nationally. • Improving local economy – The local economic recovery was also a contributor to the growth of Orange County’s lodging industry, resulting in decreased unemployment and office vacancy rates. The non-seasonally adjusted unemployment rate decreased to 5.6% in November 2013, representing a significant decrease from recent historical peak levels of 9.5% in 2010 and well below the U.S. and California’s unemployment rates of 7.0% and 8.3% respectively. 2 1 Anaheim Orange County Visitor & Conven6on Bureau 2 Bureau of Labor Sta6s6cs Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 3 AAAAAAAAAAA Source: Bureau of Labor Statistics In addition to the decreases in unemployment rates, the OC office market has seen a decline in overall vacancy rates, from 16.0% in 4Q 2012 to 14.9% in 4Q 2013 (according to information prepared by Cushman & Wakefield). • Enhanced accessibility – Enhanced transportation hubs in Orange County also contributed to Orange County’s growth in 2013. In November 2011, John Wayne Airport (JWA) completed the final phase of the $543M expansion and renovation that included the construction of a new Terminal C with six gates, a new 2,000-space parking structure, additional retail options, and various improvements to aircraft parking areas. The airport expansion increased the airport’s passenger capacity to an estimated 10.8 million passengers, and the continued expansion efforts are expected to increase the capacity to 12.5 million by 2020.3 Total passenger volume, as illustrated in the graph below, has nearly returned to pre-recession levels (2007), and the volume has been increasing rapidly in recent years. 3 John Wayne Airport Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 4 AAAAAAAAAAA Source: John Wayne Airport The significant increase in passenger volume at JWA in 2013 can be partially attributed to international passenger levels. International passenger volumes increased by approximately 145,000 in 2013, representing a 63.0% increase from the previous year. The airport renovation and expansion enabled additional airlines to provide access to the OC market. For example, AirTran and Interjet launched two daily flights from Orange County to Mexico in 2013. Furthermore, by enabling international travelers to more easily access Orange County, JWA contributed to the 5.7% increase in overall international visitation to OC in 2013. • Visitation and visitor spending – Orange County’s lodging industry benefited from increases in both visitation and visitor spending in 2013. Approximately 44.3 million people visited Orange County in 2013, as compared to 43.8 million in 2012, representing an increase of approximately 1.1%. However, the more significant driver of local growth was the increase in visitor spending, which increased to $9.5 billion, representing a 9.2% increase over the previous year. Lodging and F&B sectors both constitute $2.3 million each and represented the most significant component of visitor spending. 4 4 2013 Economic Impact of Tourism in Orange County, hHp://cdn.anaheimoc.org/cdn/farfuture/EAEn-‐ Oc1CFNZMTdjta1kEp1lGVnwU07XLnslK3e9c0U/m6me:1390503904/sites/default/files/page/103474/files/ Tourism_Economic_Impact_2013_.pdf Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 5 AAAAAAAAAAA Source: Anaheim Orange County Visitor and Convention Bureau • Limited lodging supply growth – The Orange County lodging supply is comprised of approximately 500 hotels and over 55,000 hotel rooms, but has experienced few recent additions to supply as a result of the sharp decline in lodging fundamentals caused by the economic downturn and the limited availability of construction financing. According to Smith Travel Research, total available rooms for the Anaheim-Santa Ana, CA, market experienced year-over-year increases of 0.3% in both 2012 and 2013, respectively, well below the historical long-term average. Despite the limited supply growth in recent years, the development pipeline is increasing and anticipated to have a more significant impact on hotel performance in coming years. According to PKF Hospitality, the total supply of hotel rooms in Orange County is anticipated to increase by over 1.0% in 2014. By comparison, supply growth in the Anaheim-Santa Ana, CA, market reached a recent historical peak of 1.3% in 2009. The following list illustrates key developments that are anticipated to impact the Orange County hotel room supply in the near term: • Anaheim Resort District hotels – The resort district surrounding the Anaheim Convention Center is undergoing significant development. Five hotel projects are currently underway in the Anaheim Resort district, including the Hyatt Place Anaheim Resort, Hyatt House Anaheim Resort, Homewood Suites and two Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 6 AAAAAAAAAAA SpringHill Suites. The hotels, which represent a combined 937 guestrooms, are scheduled for completion between 2014 and 2015. • Irvine hotel development – Irvine is anticipated to experience a significant increase in hotel supply in the near term, as approximately 800 hotel rooms are currently in the development pipeline. Although the Irvine development pipeline is not as significant as Anaheim or Garden Grove–which combined have approximately 3,000 hotel rooms currently under development — the projects, if completed, would increase Irvine’s guestroom supply by approximately 25.0% and represent the first hotels to open in the Irvine submarket since 2009.5 The hotel development projects furthest along include the 210-room Courtyard by Marriott at the Spectrum (November 2014) and the 170-room Hilton Garden Inn (late 2014). Transaction environment Following strong growth in 2011 and 2012, hotel transaction activity in Orange County exhibited similar excitement as investors searched for high-quality hotel assets throughout Southern California. According to CoStar Group, 27 hotel transactions occurred in 2013, as compared to 31 transactions in 2012. However, the market lacked any major transactions and was primarily comprised of smaller transactions (i.e., less than $25 million). Please refer to the list below for a summary of the most significant recent hotel transactions in Orange County: • Sheraton Park Hotel at the Anaheim Resort – The property was sold at a public auction in June 2013 for $36.2 million following a foreclosure. The property was purchased by CWCapital Asset Management LLC., a special servicer for distressed properties. • Fullerton Marriott - This transaction was part of the portfolio sale of three Marriottbranded hotels. The Fullerton Marriott is 224-room hotel built in 1988 and renovated in 2005. The property was acquired by a Chinese buyer through ASAP International Holdings. • Radisson Suites Hotel – The 199-room Radisson Suites Hotel, located in Buena Park, CA, was acquired by Khana Enterprises in June 2013 for approximately $18.6 million, or $93,000 per room. Increased institutional investor interest in high quality assets located in high quality markets such as Orange County has caused capitalization rate compression. This trend is exhibited in the Cap 5 Irvine’s Hotel Pipeline Fills Up in New Year, hHp://www.atlashospitality.com/index-‐4.html?id=1236741240 Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 7 AAAAAAAAAAA Rate Survey prepared by CB Richard Ellis; luxury hotels in Orange County were expected to trade at capitalization rates of 5.5% to 6.5% in the first half of 2013, as compared to 7.0% to 7.75% in 2012. Estimated capitalization rates for economy hotels also decreased from 8.0% to 7.0% during the same period. Additional references: San Diego Reader, http://www.sandiegoreader.com/news/2013/oct/23/ticker-san-diego-tourism-lags/ 2013 PKF Southern California Lodging Forecast, http://www.valleyconnect.com/~valleyco/images/stories/Library/ reports/2013%20so%20cal%20lodging%20forecast.pdf Sponsored by: AAAAAAAA From neighborhood boutique hotels to national chains, Barney & Barney is the insurance broker of choice for some of the most recognizable names in the hospitality industry. We have been providing premier insurance, risk management and employee benefits solutions since 1909. Our Hospitality Practice partners with clients to provide risk management and employee benefits insurance solutions specifically geared towards restaurants, resorts and hotels. We deliver strategic, measurable insurance solutions with 5-star results. The Barney & Barney Difference: Service - Our best in class talent and industry relationships enable us to handle the most complex insurance programs. We have developed custom tailored risk retention and transfer programs that translate into superior savings for your company. Expertise - Our strong relationships with hospitality industry groups and associations translates to a comprehensive understanding of your industry's needs. By leveraging industry knowledge with our extensive insurance experience, we provide solutions that reap results. Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 8 AAAAAAAAAAA Results - Our proprietary programs for workers' compensation and property and casualty coverages meet the complex needs of the hospitality industry. Likewise, our innovative employee benefits programs are designed to protect your bottom line and your human capital. International Capabilities - As a member company of the industry’s leading global insurance broker, we have the international network and expertise to protect our clients’ interests anywhere in the world. Whether you need a custom tailored employee benefits plan, a risk management strategy to maintain a strong workforce, or a return to work program, we can provide you exactly what you need to insure your success. Copyright (c) 2014 Global Hospitality Resources®, Inc., San Diego, CA USA. All rights reserved. 9
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