Los Gatos North 40 Report 2017-11-7HTL Hospitality Advisors
Brokerage, Consulting, Management
HTL Hospitality Advisors
Brokerage, Consulting, Management
Town of Los Gatos
North 40 Hotel Site Assessment
November, 2017
HTL Hospitality Advisors
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San Rafael, CA 94903
Web: www.HTLHospitalityAdvisors.com
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AREA OVERVIEW
A region’s lodging market is driven by the forces that shape the overall regional economy. As such, the Los Gatos
hotel market and projections of future market performance depend largely on the economic conditions in Silicon
Valley and, to a broader extent, the entire Bay Area. According to the Center for Continuing Study of the California
Economy:
•The Bay Area led California and the nation with
a real (inflation adjusted) GDP gain of 5.2% in
2016, more than 3 times faster than the national
growth rate
•San Jose led all metro areas in California with a
real GDP increase of 5.9% in 2016 led by gains
in tech related sectors. The San Francisco-
Oakland metro area was 2nd at 5.4% with gains
in tech and finance
•Job growth in the area has led to low
unemployment rates of 3.3% for both the San
Jose metro area and the overall Bay Area
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Site Evaluation
1.Site
2.Netflix
3.Netflix
4.Netflix
5.Roku
6.Roku
7.Cryptic Studios
8.Xilinx
H. Good Samaritan Hosp.
Site And Nearby Major Employers
The potential hotel development site is an as-yet determined site within the northern 20 acres of the North 40 Parcel. The
North 40 parcel is at the intersection of two of the region’s major highways, Highway 17 which leads from Santa Cruz
north to San Jose and continues as I-880 to Oakland, and Highway 85, which is a major connector from Highway 101 and I-
280. Lark Avenue, the southern border of the North 40 parcel, provides the access off of 17 while Los Gatos Blvd., the
eastern border of the North 40 parcel, provides access from Hwy. 85. The site is thus well-situated in terms of access,
visibility. The hotel site is close to some of the major demand generators in Los Gatos, namely Netflix and Roku , as well as
Good Samaritan Hospital (represented by H).
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Site Evaluation (cont.)
We have evaluated the potential hotel site relative to those of the hotels we have considered to be the most
competitive. These properties include two hotels within the Town of Los Gatos, both of which are situated in the
appealing downtown area; three hotels in nearby Campbell; and the Hotel Valencia in San Jose. The table below
presents our assessment of each hotel’s site relative to the subject site for a number of key factors.
•The subject site within the North 40 parcel enjoys several advantages versus the sites of the competitive
properties in the market area, due largely to the excellent access and visibility from the two adjacent Highways
•While the subject site is not surrounded by the amount of commercial development and major companies such as
in Sunnyvale, Santa Clara, and Cupertino, the properties in the local submarket are generally similar or inferior in
terms of the amount of nearby commercial space
•The two Los Gatos hotels are considered to have stronger nearby amenities due to the easy walking distance of
the numerous restaurants and retail shops in the downtown area, but inferior access, visibility, and nearby demand
•The Hotel Valencia, the largest luxury property in the competitive set, benefits greatly from its position within
Santana Row, the dominant upscale retail center in the area, but is inferior in other areas
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Hotel Market Data
•We have reviewed the lodging market in
the greater Silicon Valley area as well as
the competitive hotels in the more local
Los Gatos/Campbell market
•The Silicon Valley market has a history
of being very volatile over the years, with
cycles often showing swings of double-
digit downturns, and growth, in RevPAR
(revenue per available room)
•In the 2008-09 recession and
subsequent recovery, the market
displayed these characteristics with a
large drop followed by several years of
significant growth
•By 2016, with market occupancies
essentially at capacity due to seasonality
and weekend/weekday constraints, the
market growth slowed as hotels have
been unable to sustain large rate
increases
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Hotel Market Data (cont.)
•The hotels selected as being most comparable or competitive to what would likely be developed on the subject site
consist of hotels that range from the Upscale to Luxury categories, as defined by STR’s Chain Scales (see
attached Exhibit A to see US brands that fit in the Upscale to Luxury categories, which includes some extended
stay and focused service properties)
•The other hotels in Los Gatos, including the Best Western and Los Gatos Lodge, are older exterior-corridor
properties and not considered directly competitive
•We have compared the performance of the competitive set with the overall market, as well as several other sub-
markets in the region, including San Jose’s major downtown convention hotels
•Given the upscale nature of the selected competitive set, as well as the location in the desirable market area of
Los Gatos and Campbell, the set performs at a premium to all of the other identified groups evaluated
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Competitive Market Performance
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•Similar to the market overall, the competitive set experienced double-digit growth in RevPAR for several years
before growth slowed significantly in 2016, and a 10.6% compounded annual growth rate (CAGR) overall
•Due to patterns of demand with slower performance on weekends, as well as seasonality which limits demand at
certain times of the year, performance above 80% occupancy on an annual basis is considered to be at capacity
•Capacity constraints have limited demand growth in the market, with rooms occupied remaining basically flat since
2013 despite strong economic growth, indicating there is a substantial amount of unsatisfied demand in the market
that a new hotel could capture
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Los Gatos North 40 SWOT Analysis
Strengths
•The site’s location at the intersection of two
highways, with good access from nearby
on/off ramps
•The site would be the closest in the market
to Netflix and Roku , two of the largest
demand generators in the market
•Los Gatos’ reputation as an upscale
community, and the amenities of the
downtown area within easy driving distance
Opportunities
•Ability to develop complementary
commercial uses as part of the site plan
would enhance the appeal of the site for
hotel use
•There are a number of available brands that
could fit an upscale hotel in the market
•Unsatisfied demand in the market as
occupancy levels have reached peak levels
while economic growth continues in the
region
Weaknesses
•Limited amenities such as retail and
entertainment in the immediate vicinity
•Height limit of 45 ft. results in a max of
four stories, less desirable for an upscale
hotel
•Land prices for hotel development lag
behind pricing for alternate uses such as
office and residential
Threats
•Cyclical market has seen a long expansion
period, potential for downturn could exist
•Potential development of two hotels at
Cambrian Park retail site would be closest
to the site, potentially directly competitive
•Competition for labor and material for
rebuilding from Northern California fires,
earthquakes, could drive up construction
costs 7
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Conclusions and Recommendations
•The current strength of the local and regional lodging market indicates that, in general, new hotel development
can be accommodated
•The site for a hotel within the North 40 project area enjoys some advantages over the sites of competitive hotels
in the market area
•The location within the upscale community of Los Gatos, as well as the strong market performance, indicates that
an Upscale or Upper Upscale hotel (as defined by the STR chain scales), most likely between approximately 150-
200 rooms, would be best suited for development on the site
•With other facilities and amenities resulting in a range of roughly 700-800 gross sq. ft. per room, this would result
in a gross building area of approximately 100,000-160,000
•Due to the lack of significant tourist demand in the local market area, hotels rely on group business to support
weekend demand, and therefore the hotel should have enough meeting space to attract such group business, in
the range of 3,500 to 7,000 square feet
•It appears that there are available brands in the Upscale and Upper Upscale ranges that would be available for
such a property, and while the independent hotels in Los Gatos perform well a new property at this site would
benefit from the appeal of a brand, particularly for corporate travelers interested in receiving their frequent
traveler points from favored chains
•The ability to develop higher than 45 feet would benefit the project by providing greater visibility from the nearby
highways such as the Courtyard in Campbell with 7-stories for 162 rooms, as well as being more efficient from a
development cost perspective
•As there are limited amenities such as restaurants and entertainment in the immediate area of the site, including
such products in the overall site plan would benefit the hotel
•While the market is strong, the high development costs of new hotels requires some projects to request some
public subsidies, which often comes in the form of contributing to the cost of parking or conference space, or a
rebate of the hotel’s Transient Occupancy Tax for some period of time
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