Real Estate Alert
07/01/15

Hotel owners in the Silicon Valley area have responded to strong investor demand by offering nearly a half-dozen properties in recent weeks.

Investors have shown that they’re eager to snap up properties in Silicon Valley and the greater San Francisco Bay Area, where hotels have posted substantial gains in revenue and occupancy thanks largely to the booming technology sector. And with only a few hotels in San Francisco itself hitting the selling block, buyers have been forced to look south.

Along the peninsula, investors are finding fresh listings for large hotels in mar­kets such as San Jose, Sunnyvale and Palo Alto. The properties, which have a com­bined valuation of some $600 million, run the gamut from newly renovated luxury hotels to older properties with redevelopment potential. In every instance, brokers project that room rates will continue rising for at least two years.

In the first four months of the year, hotels in the San Jose market — which Cruz saw revenue per room rise a whopping 24% from a year earlier, according to STR, which tracks supply and demand data for the hotel industry. That’s on top of a 15.6% increase in 2014 versus the year before.

Revenue-per-room growth “has been tre­mendous,” said Thomas Callahan, a senior managing director at PKF Consulting. Revenue is projected to rise another 14% this year and then return to more-normal increases of 8.2% in 2016 and 7.1% in 2017 as occupancy rates stabilize and gains are fueled primarily by ris­ing room rates, he said.

The bullish outlook has sellers poised to ring up substantial gains on the listed properties.

Among the largest is the 506-room San Jose Marriott, valued at roughly $160 million. Owner CBRE Global Investors of Los Angeles paid $85 million for the property two years ago and completed a substantial renovation that included an overhaul of its 23,000 square feet of meeting space and a technology update. The hotel is connected to the San Jose Convention Center. Eastdil Secured has the listing.

Prudential Real Estate Investors and joint-venture partner Lodging Capital of Chicago are shopping the 421-room Sofitel San Francisco Bay, in Redwood City, which underwent some $9 million of renovations last year. The hotel is expected to trade for about $155 million, well above the $92.5 million that the Pru partnership paid in 2012, when luxury hotels were largely out of favor. Eastdil is also marketing the Sofitel, which is within a mile of the headquarters of Oracle and Electronic Arts, and six miles from a Google office complex.

In Sunnyvale, a 173-unit Sheraton is being pitched as an expansion play because a buyer could add 169 rooms. It is valued at roughly $100 million, with the expansion costing an estimated $60 million. Owner Goldman Sachs has given the listing to Eastdil.

In Palo Alto, considered the heart of Silicon Valley, a one-year-old boutique hotel has hit the market. The 86-room Epiphany, which recently underwent a $27 million redevelop­ment, is expected to fetch roughly $65 million. Eastdil is also marketing that property for an unidentified owner.

Moving north, the leasehold interest in the Marriott San Mateo San Francisco Airport is expected to trade in the vicinity of $155 million. JLL is marketing the 476-room hotel on behalf of Tarsadia Investments of Newport Beach, Calif. In the past four years, the property’s revenue per room has grown an aver­age of 12%, according to marketing materials. The ground lease runs through 2084.

Buyers are seeking out properties in close proximity to cor­porate campuses of the largest tech companies, and for good reason. According to JLL, a set of select-service hotels near Apple’s campus in Cupertino saw revenue-per-room growth of 14% annually from 2009 through 2014. The same thing is expected to happen as companies such as Google and Facebook complete planned expansions.

Despite the robust performance of the Silicon Valley/Bay Area lodging sector, the development pipeline is relatively light. This is prompting more investors to seek out redevel­opment and repositioning plays, which include tearing down older properties, said Alan Reay, president of brokerage Atlas Hospitality. “There are definitely a number of buyers that are looking for exactly that kind of product,” he said.