Investing in Los Angeles Malls vs. Hotels – A Comparative Analysis
October 4th, 2013 by Diane Moore
The commercial real estate market in Los Angeles has been improving over recent months amidst the increase in rental tariffs and the new concept of creative spaces that are being introduced throughout much of the county, which is making the retail sector highly competitive.
In central Los Angeles, large office buildings and retail spaces are reaching their peak, prompting the sale of these commercial spaces. Many property investors purchased commercial real estate during the poor economic climate and have succeeded in capitalizing. Many buildings are being marketed at much higher prices than last year, and as long as interest rates remain low, this trend is expected to continue.
Shopping Mall and Retail Real Estate
So, how does this affect property investors in Los Angeles at the moment? Well, many are looking towards the future, where LA and its surroundings are slowly evolving into a more retail focused city, as opposed to the technological, media and entertainment center that it has traditionally been labeled as. This means that more malls are being developed, and big, well known companies are looking to relocate to the cities in and around Los Angeles.
Hotel and Hospitality Real Estate
Similarly, hotels, motels, and other accommodation options have always played a big part in the economy of the area with plenty of famous celebrities and tourists visiting the Los Angeles area. Hotels are constantly evolving as well, with many offering multiple features that make them so viable, including casinos, shopping malls of their own, office centers, and other facilities. So, what are the actual figures involved and how do we look at the better investment opportunity if you want to get into the commercial real estate market in Los Angeles? Well, let’s take a look at the various options and opportunities that are available.
The Mixed Use Hotel-Retail Renaissance
What many investors can also consider thanks to a recent seminar held by the JMBM Hospitality Group, is the possibility of investing in a mixed use hotel-retail option, or purchasing a hotel and then adding a shopping mall onto it. There are many benefits to this strategy and can increase the value of a particular property dramatically.
The Hotel-Retail trend is a hot topic among real estate professionals and according to recent case studies and economic analysts, this is a popular trend that will increase and become even more viable over the course of 2013 and 2014.
This is not a new trend however. The mixed use developments were talked about and initiated just before the Great Recession of 2006 and 2007, and were put on the back burner due to lack of funds and the general decline in the market. Some of the main projects underway at the time included the Westin Dallas Galleria, Ritz-Carlton Tyson’s Corner Galleria, and the Ritz-Carlton Water Tower Place. However, with the industry improving once again, these and other similar developments are now back in full swing and are said to be more feasible than ever before.
The strategy behind the mixed use development idea is a simple one. According to research the right hotel added to the right type of mall or retail development can boost retail sales by 20-40%. Similarly, a shopping mall can boost hotel revenue by an equally comparable amount (around 30-40%). They have a symbiotic effect on each other and the overall aim is to increase sales and boost profits all round. There are competitive advantages for both hotel owners and retail owners – and double the advantages for commercial real estate owners!
According to travel representatives, the synergistic nature of the hotel-shopping mall idea is based on the fact that 77% of travel every year is for recreational and leisure purposes, and shopping is always rated as the first or second most important leisure activity for travelers to any city, whether they are locals, or overseas visitors.
Comparative Analysis of Shopping Malls vs. Hotels in LA
When we look at the current real estate market, we can see that certain prime locations are available that would be ideal for investments, considering the rental that they pull in. Aside from this, they offer tons of potential in terms of further development either in retail or the hotel sector.
Some of the major shopping retail centers for sale include:
- 1716-18-20 Main Street, Venice – This retail center is located right across from Joel Silver Film Production Offices and adjacent to Mark Burnett’s Amplify. This means that there is ample room for growth and the possibility of including hotel accommodation would boost revenue and increase the value of this commercial property dramatically. It is on offer for only $4,500,000.
- Concert Park – Various retail spaces have become available in the popular Concert Park area in Playa Vista, and the highly profitable portfolio is on offer for $19,217,000.
- The Mercury – Shops are for sale at The Mercury with an exceptional tenant mix and high class location. The asking price is $16,250,000.
Some of the biggest names in the hotel industry that have offered commercial property for sale in recent months include:
• La Costa Resort located in Carlsbad, San Diego sold to the Omni Hotels and Resorts Group for $ 368,5 million which was the largest sale for the year.
• The Claremont Hotel Club and Spa in Berkley sold for $ 511 million as part of a $ 1.46 billion deal that also included La Quinta Resort & Club in La Quinta, the Grand Wailea in Hawaii, and the Arizona Biltmore in Phoenix.
• Sheraton Los Angeles Downtown Hotel sold for $ 65 million to a local developer by the name of Wayne Ratkovich, and was said to be the largest in the Los Angeles County region.
According to Atlas Hospitality Group, the dollar value of these sales jumped by a whopping 24% during the first half of 2013 and the overall sales market of hotels increased by 12% since 2012. It is predicted that the hotel and hospitality industry will continue to rise thanks to the improving world economy. With regards to the Los Angeles commercial real estate market, the president of Atlas, Alan Reay said, “In terms of desirability from buyers, first choice is still West L.A. That market, which is one of the strongest in the country, also includes Beverly Hills, Santa Monica, and West Hollywood.”
Currently, it is a good time to get in on the ground floor, so to speak, as hotel room rates and prices continue to rise. With time the development of many new hotels and mixed use retail-hotels will come, which will dampen the price appreciation and encourage competitive rates for rooms, and will slow the industry somewhat. This will affect the revenue generated by the various hotels on the market at the moment.
Comparatively speaking, the hotel market is stronger than the retail market, however, the idea of the mixed use development makes both options viable for real estate investors. Looking at each sector of the market on its own merits, one can argue that the retail market offers more in terms of profitability with some of the biggest names in the retail industry looking for great rental spots in Los Angeles, especially in the most popular areas like Hollywood and Santa Monica.
This can be further confirmed when you look at the recent opening of a huge Apple store in Santa Monica Promenade. Other huge retail outlets that have opened or that are opening in Los Angeles and surrounding areas, with some headquarters also located here, include:
• Ikea• Raw Denim• American Apparel• Fresh Brothers• Forever 21• California Pizza Kitchen• Gap• Trader Joe• Walt Disney Corporation• JC Penny• Macys• Dior• Hugo Boss• Diesel• Sears• Marshalls• Bloomingdales• And many others
Looking at both options, there are merits to each one and they can be highly profitable in their own way. For real estate investors, purchasing a hotel or retail space would be a great move in this market, where many other commercial properties are being sold off for good prices. Offices and industrial sectors are showing a great seller’s market, whereas the hotel and retail sector has only just begun, and getting in on the ground floor will set you up to succeed in your endeavor, whether you want to wait for the market to grow even more, or start your own development that will boost your revenue substantially and increase the property value exponentially.
Biggest Malls and Hotels Located in the Los Angeles Area
Throughout Los Angeles, the biggest, most lucrative hotels include:
• The Sheraton• The Westin• The Ritz Carlton• The Hilton• Four Seasons• Miramar
The biggest and most famous shopping malls in LA include:
• The Grove• Beverley Center• Hollywood and Highland• South Coast Plaza• Santa Monica Place• Glendale Galleria
As you can see, with already large commercial real estate market and exceptional range of high quality tenants, Los Angeles and the surrounding areas, provide a top hotel and retail market to get into, and one that will only continue to climb.
Conclusion and Final Thoughts About Investing in Hotels vs. Shopping Malls
As you can see, the Los Angeles commercial real estate market offers excellent investment opportunities, whether you want to purchase an existing hotel or shopping mall, or develop a new one. For those considering the benefits of a mixed use hotel-retail complex, Los Angeles provides the ideal location and some top class locations for this type of development. Still in its early stages, you will find that the investment in this kind of revolutionary concept will be most rewarding and provide many lucrative benefits, not only for the revenue that it will generate, but for any future sales that you might be interested in, as the market settles. Either way, investing in hotels or shopping malls will provide you with the solutions that you are looking for in terms of making a solid investment.
Even looking into the future, when the over saturation of the market will likely force hotels to make their prices more competitive, and encourage retail tenants to adjust accordingly, the investment still remains viable, as the travel industry continues to grow, despite market fluctuations, specifically to a location such as Los Angeles, where millions of people flock every year.
The main aim, would therefore, be to get in on the ground floor of a major development, mixed use or otherwise, invest in a highly lucrative, popular tourist area that has yet to realize its full potential, and look for hotels or shopping malls where there is room for expansion.
This will ensure that you get the best value that your money can buy, and allow your investment to grow over the next few years. What you want is to secure a high profit margin, and to ensure that your investment is not a short term deal, but more of a long term one, with plenty of potential and opportunities attached to it. This will give you room to breathe and manipulate the markets as they change. The best idea would be to get a professional, commercial real estate broker to discuss the various options with you, and advise you on the best retail or hotel properties for sale.
So, finally, when comparing hotels and shopping malls, from an investment point of view, they are similar in what they can offer you, and each have their own set of benefits and disadvantages, however, one of the best options might be to look at investing in a hotel-retail mixed use development, which is set to sky rocket the commercial real estate market over the next few years. This will give you plenty of room to explore both types of industries and capitalize on both real estate markets simultaneously. With many new developments currently being conceptualized, make sure that you keep your ear to the ground and contact a broker who can get insider knowledge of when these sales might occur.
The trick is to act quickly or be left behind and lose out on possibly the biggest real estate trend to hit the country in a long, long time. As they say, “go big or go home”, and with the new hotel-retail opportunities, this is precisely what you should be thinking, so that you can act accordingly. This investment will be well worth your time and effort and even though it could cost more, the long term rewards are set to be astounding!
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