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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 1050 Northgate Drive, Suite 440 San Rafael, CA 94903 Web: www.HTLHospitalityAdvisors.com Atlanta · Las Vegas · Los Angeles Orlando · Phoenix · San Francisco HTL Hospitality Advisors Brokerage, Consulting, Management 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 1 HTL Hospitality Advisors Brokerage, Consulting, Management 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). 2 HTL Hospitality Advisors Brokerage, Consulting, Management 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 3 HTL Hospitality Advisors Brokerage, Consulting, Management 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 4 HTL Hospitality Advisors Brokerage, Consulting, Management 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 5 HTL Hospitality Advisors Brokerage, Consulting, Management Competitive Market Performance 6 •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 HTL Hospitality Advisors Brokerage, Consulting, Management 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 HTL Hospitality Advisors Brokerage, Consulting, Management 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 8