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Financing Pinch Takes a Toll on Hotel Construction in California

February 27, 2001

The number of new hotels built in California dropped by more than a third in 2000 as hotel financing became more difficult to obtain, according to a new report.

Sixty-four hotels were built in the state last year, down from 101 in 1999, a study by Costa Mesa-based Atlas Hospitality Group said.

Despite lower interest rates in 2000, financing was harder to find because "lenders became very conservative," said Alan X. Reay, president of Atlas. Lenders in 2000 often required developers to pay 40% to 50% of the cost of projects, compared with 20% to 25% in 1999, Reay said.

In Southern California, 25 hotels were built last year, down from 32 in 1999. The report said Northern California suffered the largest drop in new construction, down to 39 hotels from 69 in 1999.

The hotels built in Southern California included eight in Los Angeles County, nine in San Diego County, three in Orange County, two each in Santa Barbara County and the Inland Empire, and one in San Luis Obispo, according to the study.

New construction in 2000 represented a growth of less than 1% in the number of new hotel rooms, the report said, compared with an increase of 4% to 5% in demand for new rooms.

The difference between supply and demand is expected to continue this year and should boost room rates, especially for better-quality hotels, the study said.

Higher room rates, in turn, "should lead to an increase in hotel sales prices, providing that lenders do not tighten their purse strings too much," it said.

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