In 2023, only four of approximately 30 hotel transactions in the Los Angeles market were above $20 million, three of which occurred in the third quarter. In April, a new transfer tax on residential and commercial real property went into effect, potentially impacting hotel values. Since the transfer tax took effect, only four hotels have traded in the city of Los Angeles. Three are slated for conversion and were exempt from the "Mansion Tax", and the other sold for less than $3 million. The "Mansion Tax," officially the "Homelessness and Housing Solutions Tax," means that if a sale amount exceeds $10 million, it will be subject to an additional tax rate of 5.5%.

The new tax law, higher interest rates, increased housekeeping wages, and the largest union strike in history in SoCal have impacted investment activity in the market. Additionally, investors and developers could have been hesitant to move forward on hotel investment in the city of Los Angeles due to the "Responsible Hotel Ordinance" being on the March 2024 ballot, which would have required hotels to allow the city's homeless agencies to send individuals or families to empty hotel rooms. The measure was withdrawn in December and will not be on the ballot. LA City Council approved a compromise ordinance impacting developers more than owners.

Other hotels outside the city limits of Los Angeles have traded since April; however, investment activity is still muted, and most of the hotels that sold in 2023 were Economy class hotels or part of larger national portfolio transactions. This is in line with the national commercial real estate investment slowdown. In the past 12 months, hotel sales volume was approximately $383 million. Apart from 2020, the annual hotel investment volume has exceeded $1 billion each year since 2014.

The high-priced tax-exempt transaction included hotels slated for conversion. In September, the Housing Authority of the City of Los Angeles sold the 133-room Extended Stay America LAX Airport to American Family Housing, Inc. for $50.7 million, or $381,120/key.

In August, ICO Investment Group sold the 294-room Mayfair Hotel to the City of Los Angeles for $60.3 million, or $204,923/key. The previous owner purchased the hotel in 2012 for an undisclosed price. The city of Los Angeles plans to convert the hotel as part of the Inside Safe initiative, which is a housing-focused solution to combating homelessness. The city plans to complete renovations for approximately $19 million and spend roughly $4 million toward project oversight, resulting in an estimated total spend of $83 million. The city hopes to reopen the Mayfair in February.

Still, hotel investment activity could shift, and more discounted or distressed deals could transpire due to CMBS debt maturing in approximately 50 hotels in the next two years.

Here are several graphs illustrating the current hospitality market in Los Angeles County: