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Southern California luxury resort market - Here comes the sun.
Wednesday, 12th February 2014
Source : Leah Dauer Murphy & Aaron Solaimani

Following an extraordinary increase in supply and other challenges of the mid-2000s, Southern California resorts have boasted a strong recovery, with 2014 on pace to be a record-breaking year for group room nights.

Southern California has one of the world’s most attractive coastlines and is renowned for its natural beauty, sprawling beaches, access to entertainment, and pleasant climate.

Part of this destination’s appeal is its supply of resort hotels, which range from small limited-service oceanfront properties to expansive luxury full-service golf resorts. Luxury resorts are sprinkled along the oceanfront from Santa Barbara County south to San Diego County and have been performing at record occupancy levels in the last year.

In particular, the strength of the resort market and the extraordinary high barriers to entry for new supply – resulting from the difficult entitlement and development process, limited number of oceanfront sites, and high costs of construction – make the area attractive to hotel investors and lenders.

With the market’s ready access to a statewide population base of roughly 38 million people and a regional drive-in population of approximately 22 million people (10 million in Los Angeles County, a combined 4 million in Riverside and San Bernardino Counties, 2 million in combined Santa Barbara and Ventura Counties, and 3 million each in Orange County and San Diego County), resorts in Southern California are a strong draw for local individuals and groups alike. Easy airport access to four international airports (Los Angeles International (LAX), Long Beach, John Wayne/Orange County in Santa Ana, and San Diego International) provides adequate airlift for both domestic and international visitors.

Resort demand in this region is driven by meeting and group business (50-60%), with the balance made up of leisure travelers. Meeting and group demand is essentially corporate and incentive in nature, supplemented with social group business. The region’s luxury properties appeal to corporate groups seeking a resort or recreational environment for meetings and events. Given the picturesque locations, easy accessibility, and moderate climate, the California coast as a whole offers a competitive advantage relative to other resort markets in the United States. Wedding groups are attracted to this market for the same reasons.

With its desirable year-round climate, the market is moderately seasonal in nature. Occupancy levels peak in the mid- to high-80% range in the summer months as vacationing families use school breaks to visit the myriad tourist attractions and beaches. Group meetings account for a larger percentage of occupancy in spring and fall, and the market typically reaches its nadir in the low-50% range in December. Average rate levels follow similar trends as occupancy, with peak demand in the summer allowing for higher rates than those achieved during winter months.


Based on information available in the HVS database, we have compiled the performance of ten luxury resorts in Southern California to represent the overall supply and demand trends recorded by the regional market area since 2001. These full-service resorts are located along the Southern California coastline and include properties with a range of 200 to 600 guestrooms. The corresponding composite supply and demand trends are outlined in the chart below.

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As a result of the long and challenging process to secure entitlements and the high cost of construction, new lodging properties proposed for the Southern California coastal area can take years, if not decades to develop. The resort market received two major waves of new supply in the 2000s, essentially doubling the number of available guestrooms in the market.

Despite this significant increase in supply, the market demonstrated a remarkable ability to absorb it. Since 2001, occupied room nights have more than doubled, reflecting a net increase of 121% compared to an 86% net gain in available rooms. During the period reviewed, demand only declined in two of the last 13 years.

Demand declined very modestly in 2007 and 2008, for a combined total loss of approximately 5,000 room nights. Consequent to these supply and demand trends, market occupancy has seen large swings from peaks in the mid-60% range to a low point of 46.2% in 2009. Occupancy grew in 2010 with strong demand improvement. Market occupancy has been on an upward trajectory, a trend that continued through 2013 and resulted in the market surpassing the previous peak occupancy recorded in 2006.

Concurrent with fluctuations in occupancy, average rates have also been affected by the same aforementioned influences. Typical of many luxury resort markets, the Southern California resorts are able to garner stronger average rate growth during periods of high demand, and discount average rates more drastically when economic conditions are less favorable.

In the most recent cycle, average rates reached annual peak levels in 2007 and 2008 of over $390, subsequently declining in 2009 through 2010 to levels similar to what was recorded in 2004. As the economy began to recover, average rates increased in 2011 through 2013.


Due to the market’s attractive features and ready access for drive-to visitors, the Southern California resort market has rebounded significantly in recent years from its low in the mid-2000s. Occupancy levels are now at a ten-year high and average rates continue to increase toward their prior peak. The dark clouds of the recent recession, the negative publicity from corporate spending at group events, the absorption of new supply, and the contraction of group meetings have lifted.

The Southern California resort market began to recover in mid-2010 and has continued to pick up steam through 2013. Coinciding with the beginnings of economic recovery, demand began to rebound in the summer of 2010 and continued to grow vigorously through 2011, primarily driven by leisure travelers.1

Corporate groups began to return to the market in early 2011; as many resort properties offered very competitive pricing to entice group business. Group pace gained velocity in 2012 and 2013 and is on track to be exceptionally strong in 2014 and 2015, with many properties reporting a record number of group room nights on the books for 2014.

In addition, meeting planners have reportedly begun to extend their booking windows. With the return of the group business to the market, no new supply on the immediate horizon, and a readily available base of drive-to leisure demand, the resort market is well positioned to start pushing stronger average rate growth in 2014 and 2015.


Given Southern California’s destination appeal and the high average rates of its luxury resorts, hotel developers actively pursue sites for new resort construction. The difficult entitlement and development process and the cost of construction impart a practical level of supply constraint, limiting long-term prospects of new competition. California has not experienced the dense development along the oceanfront typical of other resort areas like Florida, Hawaii, and Mexico. The coastline or Coastal Zone2 is subject to regulation by the California Coastal Commission.

Development activities, which are broadly defined by the Coastal Act of 1976 to include (among others) construction of buildings, divisions of land, and activities that change the intensity of use of land or public access to coastal waters, generally require a coastal permit from either the Coastal Commission or the local government. The approval process can be long and arduous and is not always successful. Many local jurisdictions in California also have stringent entitlement requirements which can affect the design, scale, and timing of projects.

As of the date of this report, no major coastal resort developments were under construction for the Southern California luxury market. A handful of hotels and resorts have been proposed for sites in Santa Barbara and Los Angeles Counties over the last ten to fifteen years; these projects are not expected to open for several years, if at all.

The most recent development was the renovation and reopening of the El Encanto Hotel and Garden Villas in Santa Barbara. The 83-room historic resort originally opened in 1918 and was purchased by Orient-Express Hotels for $26.0 million ($313,253 per room) in November 2004 for redevelopment. In September 2006, the property was closed for a complete renovation and expansion.

with a new spa, pool, fitness center, and nine new guestrooms. The project was stalled because of the onslaught of economic recession woes and problems maintaining financing for the extensive renovations. Construction on the project resumed in mid-2010 and the resort reopened as a 92-room luxury resort in mid-March 2013. The reported cost of the redevelopment project was $108 million ($1,173,913 per room).3

Other projects along the coast have also been challenged by the high costs of construction and the timing of economic cycles. As a result of these extensive development processes along the California coast, developers are now seeking opportunities for sites outside of the Coastal Zone within the Southern California market area.


Southern California luxury resorts are attractive investments to hotel buyers for an array of different reasons, including their locations on or near the Pacific Ocean, their lush amenity offerings, the ease of access to world-class golf courses and world-famous beaches, the highly desirable climate, and high barriers to entry for new supply.

However, the hefty purchase prices and extensive amenities and infrastructure required to operate luxury resorts limit the pool of potential buyers. The following chart details the major Southern California full-service resorts that have transacted since 2000.

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As noted in the chart above, with a select number of luxury resorts and a limited pool of buyers, Southern California resorts do not transact nearly as often as other types of hotel properties. When they do transact, sales prices are very high – often in excess of $500,000 per key.

It should be noted that because of deteriorating market conditions and lack of credit available for hotel purchases between 2008 and 2010, there was only one transaction during that period. Even in the economic nadir of 2009, the one transaction in this time period represented a purchase price of greater than $250,000 per room.

Once financing became more readily available beginning in 2011, transactions accelerated. The improving market fundamentals and the positive relationship of sales prices to replacement costs have supported ever higher prices.

Two recent transactions illustrate the appeal of Southern California resorts to investors and are outlined below:

  • In mid-2013, the Omni La Costa Resort (formerly La Costa Resort) was purchased from KSL Capital Partners by Omni Hotels & Resorts as part of a portfolio of five expansive resorts totaling more than 2,300 rooms, 12 golf courses, and five spas. [The four other properties that were purchased along with La Costa are Barton Creek Resort & Spa (Austin, Texas); Rancho Las Palmas Resort & Spa (Rancho Mirage, California); The Grove Park Inn (Asheville, N.C.); and The Homestead (Hot Springs, Virginia).] Prior to this portfolio sale, La Costa Resort had changed hands through what was the only luxury Southern California resort transaction between 2006 and 2011. Due to the subsequent recessionary economic climate, previous owners of the La Costa Resort were unable to meet debt obligations and the resort entered foreclosure. In November 2009, KSL Capital Partners acquired the $380 million debt on the loan for $120 million in an all‐cash purchase. Over the course of their holding period, KSL spent nearly $40 million to renovate the property and operated it until economic conditions improved. In June 2013, the La Costa Resort was then sold in the portfolio transaction to Omni Hotels & Resorts. We note that details pertaining to the actual sale price of each property in the portfolio were unavailable; the allocated sales price per room was computed through the total portfolio purchase price divided by the total number of rooms in the portfolio.
  • Bacara Resort & Spa transacted twice since 2011. The more recent of these transactions occurred in February 2013, as a joint venture between Rockpoint Group LLC and Ohana Real Estate Investors (which acquired the property in 2011 for $105 million, or $291,667 per room) who sold the property to Irvine-based Pacific Hospitality. During the brief period of ownership, Ohana invested over $27 million in phased renovations and successfully improved the profitability of the resort. The resort was marketed for sale throughout 2012, during which multiple offers were made on the property. Rockport/Ohana declined to sell at the time and continued to operate the resort. As overall economic conditions in the Southern California resort market continued to improve and Bacara’s profitability strengthened further, the property was placed back on the market. It sold for approximately $184.9 million, or $513,611 per room, an increase of 76% over the prior transaction.

The Southern California resort market consists of unique destination properties from Santa Barbara to San Diego. Despite the extraordinary increase in supply and other market challenges of the mid-2000s, area resorts were able to record robust demand growth.

This strong performance is anticipated to continue over the foreseeable future, especially with no new supply on the horizon.

Local resort operators have reported that 2014 is set to be a record year in terms of the number of occupied group room nights, and the booking pace for 2015 is also active. Groups are regaining confidence and extending their booking windows, which provides a solid base of room nights and creates compression.

This allows the resort operators to yield manage leisure business and enhance average rate growth. The return of group demand is considered the critical missing piece for Southern California resorts and, with such strong booking pace for the near term, spending in Food & Beverage and ancillary departments is anticipated to increase and help achieve more profitable operating margins. The Southern California resort market is forecast to remain sunny through the next several years.


1 During softer economic periods when group demand is more constrained, operators can attract leisure demand from the surrounding population base. Conversely when group usage of resorts is stronger, leisure demand is displaced with large group business that also generates a significant amount of revenue in resorts’ ancillary departments and is typically more profitable business.
2 California Coastal Commission, “On land the coastal zone varies in width from several hundred feet in highly urbanized areas up to five miles in certain rural areas, and offshore the coastal zone includes a three-mile-wide band of ocean.”
3 Christopher Reynolds, “El Encanto Hotel in Santa Barbara Takes a Big Step Up,” Los Angeles Times McClatchy-Tribune Regional News, April 28, 2013.

About HVS
HVS is the world’s leading consulting and services organization focused on the hotel, mixed-use, shared ownership, gaming, and leisure industries. Established in 1980, the company performs 4500+ assignments each year for hotel and real estate owners, operators, and developers worldwide. HVS principals are regarded as the leading experts in their respective regions of the globe. Through a network of more than 30 offices and 450 professionals, HVS provides an unparalleled range of complementary services for the hospitality industry. Superior Results through Unrivalled Hospitality Intelligence. Everywhere.

About the Authors
4Hoteliers Image LibraryLeah Dauer Murphy is a Vice President with the HVS Los Angeles office. She is a California state-certified general appraiser and also holds two degrees with Washington State University, including an M.B.A. from the College of Business and a B.A. from the School of Hospitality Business Management.

At HVS, Leah performs appraisals, feasibility studies, and consulting assignments on hotels and resorts throughout the United States and abroad. Ms. Murphy can be contacted at: +1 (424) 208-1261 or

4Hoteliers Image LibraryAaron Solaimani is an Analyst with the San Francisco office of HVS. He performs hotel and resort appraisals and financial feasibility studies for various property types throughout California and nationwide.

Aaron has an abiding interest in working on studies involving proposed hotels where a broader scope and alternative visions are needed. He received his B.A. degree from the School of Hospitality Business Management at Washington State University. Mr. Solaimani can be contacted at: +1 (415) 268-0362 or

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