The strength of the hotel market reflects the popularity of Los Angeles with both European and Asian tourists, primed by the weakness in the U.S. dollar, which makes American vacations a bargain for international travelers, according to Troy Jones, a partner in Ernst & Young's office in downtown Los Angeles.

One recent high-profile deal was the $366.5 million sale of the 726-room Century Plaza Hotel to a partnership of Next Century Associates and D.E. Shaw. The seller was Sunstone, a REIT based in San Clemente, Calif. The deal was “the only hotel sale of any significance in the past half year in Los Angeles, and possibly in the entire country,” says Jones. Much of the price reflects the scarcity of hotel rooms in Century City, the largest office enclave in the West Los Angeles area, he adds.

Meanwhile, in the coveted Beverly Hills hotel market, the $200 million, 201-room Beverly Hills Montage hotel is nearing a fall 2008 completion. The project survived a ballot-referendum challenge in 2004 brought by surrounding hotels, which sought to derail the project by popular vote. The developer is Phoenix-based Athens Group. The hotel operator, Montage, is a company whose largest investor is Pierre Omidyar, founder and chairman of eBay.

Where's the bottom?

Despite a smattering of high-ticket property sales, however, investment activity is quiet in Los Angeles. Bostic, the USC professor, says that there is plentiful capital waiting to enter the market for commercial real estate as soon as the investment community is convinced that property values will fall no further. “The interesting question, and I don't have an answer for it, is when investors decide that the market has hit bottom,” he says. At that point, he adds, capital is likely to rush back into the Los Angeles market.

One prediction Bostic is willing to make, however, is that the bubble mentality of the early 2000s will be replaced by a more cautious and conservative approach to valuation. “We will see more consideration of the underlying fundamentals of these assets, and whether prices and valuations make sense, given the cash flows.”

Nobody, of course, knows how much of a hit Los Angeles real estate will take by the time the recession is over. The strength of fundamentals — limited supply, steady demand, and sustained interest from institutional investors — suggests that the Los Angeles market will start the next business cycle without too much excess space to shed.

Morris Newman is a Los Angeles-based writer.

LOS ANGELES - BY THE NUMBERS

LARGEST PRIVATE EMPLOYERS

1. Kaiser Permanente
   32,180 employees

2. University of Southern California
   26,446 employees

3. Northrop Grumman Corp.
   21,000 employees

Sources: Los Angeles Almanac, L.A. Business Journal

REGIONAL Population:
10.36 million

Source: Los Angeles Almanac

UNEMPLOYMENT RATE:
7%

Source: The Kyser Center for Economic Research

METRO AREA VITAL SIGNS

Office:

8.7% vacancy, 2Q 2008

7.4% vacancy, 2Q 2007

$31.31 rent per sq. ft., 2Q 2008

$29.31 rent per sq. ft., 2Q 2007

Source: CoStar

Multifamily:

4.2% vacancy, 2Q 2008

3.4% vacancy, 2Q 2007

$1,408 effective rent, 2Q 2008

$1,347 effective rent, 2Q 2007

Source: Marcus & Millichap

Retail:

3.4% vacancy, 2Q 2008

2.7% vacancy, 2Q 2007

$27.37 rent per sq. ft., 2Q 2008

$26.83 rent per sq. ft., 2Q 2007

Source: Reis

Industrial:

2.16% vacancy, 2Q 2008

1.8% vacancy, 2Q 2007

$0.70 rent per sq. ft., 2Q 2008

$0.66 rent per sq. ft., 2Q 2007

Source: CB Richard Ellis

Hotel:

78.5% occupancy, 2Q 2008

80% occupancy, 2Q 2007

$131.93 average daily rate, 2Q 2008

$123.94 average daily rate, 2Q 2007

Source: Smith Travel Research

MAJOR PROJECTS

L.A. LIVE: A 4 million sq. ft. sports and entertainment development within walking distance of Staples Center and The Los Angeles Convention Center in downtown Los Angeles centering on a 878-room J.W. Marriott hotel. The project features a mix of entertainment venues, restaurants, retail and residences, plus television and radio broadcast studios and concert spaces.

Developer: Anschutz Entertainment Group

Completion: Fall 2008

Cost: $1.5 billion

AMERICANA AT BRAND: A 900,000 sq. ft. shopping center that features imaginative architecture in Glendale, Calif., and combines high-end retail, housing and entertainment. This project is designed to re-energize the downtown with 75 shops and fashion boutiques along with cause and fine dining in an outdoor setting. The residential portion of the development features 238 luxury apartments and 100 luxury condominiums.

Developer: Caruso Affiliated

Completion: May 2008

Cost: $400 million