HotelNewsNow
08/26/15

California Raisin’ Prices as Deal Volume Drops
With construction limited by available space and high costs, hoteliers in California are spending top dollar to buy existing properties.
By Bryan Wroten

http://www.hotelnewsnow.com/Article/16541/California-raisin-prices-as-deal-volume-drops

REPORT FROM THE U.S.—Hoteliers spent a total of $4.4 billion in hotel sales in California during the first six months of 2015, an amount that outpaces every full-year total for the state since 1994 except for 2006, according to the Atlas Hospitality Group’s mid-year sales survey.

The survey found that while the number of transactions between 1 January and 30 June 2015 decreased year over year from 2014, the sales prices increased by almost 64%. Thirteen transactions surpassed $100 million this year, compared to four in the first half of 2014.

“For six months, it’s an absolutely phenomenal number,” said Alan Reay, president of Atlas.

The decline in the number of transactions from mid-year 2014 (187) to mid-year 2015 (174) wasn’t much of a surprise, he said. The state saw a new sales record with 399 transactions for the full year of 2014, he said.

In reviewing the average sale prices, Joel Hiser, principal for HTL Hospitality Advisors, cautioned that some of the more expensive transactions will skew the averages. The median prices will probably continue to increase a little in the coming months or next year or two, he said, but the industry is reaching new heights here, and he’s not sure how much longer it can continue to climb.

Big spending by the bay
The hotel transactions environment in San Francisco area sums up the mood of what is going on with pricing, Reay said. The city saw eight transactions in the first six months of the year, he said, and five of those assets sold for about $500,000 per room.

“Why is that important?” he asked. “Up until 2006, no deal in San Francisco sold for above $500,000 (per room).”

The Northern California region could bear sale prices of $1 million a room, he said, but it took San Francisco until 2006 to break the $500,000 per room barrier. It was only one hotel at the time, he said.

“Now we’re having it broken on a regular basis,” he said. “Even though it took a long time to get to that price point, it seems we have really gone through it.”

The most expensive property sale during the first half of 2015 was Hilton Worldwide Holdings’ purchase of The Parc 55 in San Francisco from Wyndham Hotel Group in February 2015. Hilton paid $530 million for the 1,024-room hotel, using some of the $1.95 billion in proceeds from its sale of the Waldorf Astoria New York to the Beijing-based Anbang Insurance Group.

During Hilton’s 2014 fourth-quarter earnings call on 18 February 2015, CEO Christopher Nassetta said that The Parc 55 represents more than a third of the company’s purchase portfolio by number of rooms and won’t require any meaningful incremental capital expenditures in the near term. Revenue per available room at Hilton’s U.S.-owned and managed properties rose 7.3% in the fourth quarter of 2014, he said, due to robust group performance in a number of cities, including San Francisco, where group revenue overall increased between 15% and 25%.

The Parc 55 is “a great asset, essentially adjacent to our existing Hilton,” Nassetta said, according to a transcript of the call. “We can run it as basically one big hotel. We can garner efficiencies out of both sides. We can drive by bringing in the Hilton system. We can drive incremental market share in what is one of the strongest growth markets in the country.”

Factors driving prices up
California’s economy is doing well right now, and San Francisco in particular is one of the strongest-performing metropolitan areas in the world, Hiser said. The San Francisco/San Mateo market had a strong first half of 2015, with occupancy at 83.1%, an increase from 81.9% in the first six months of 2014, according to data from STR, Hotel News Now’s parent company. ADR grew as well, increasing to $213.98 from $195.28. RevPAR hit $177.90, up from $159.89 during the same period last year.

Hotel owners and investors have a lot of interest in the area, but there’s not a lot of product for sale, he said. It takes so long to build a new hotel, and the cost of construction is expensive for new hotels, he said. In San Francisco, because of government regulation and the difficulty in finding land to develop, it could take as long as seven to 10 years to build a new, full-service hotel in the city, he added.

“That only bodes well for pricing on existing assets,” he said.

Adding to the high prices is the interest of foreign investors, who are looking at not only luxury properties, but upscale and upper upscale, Hiser said.

There’s a tremendous amount of foreign capital coming into California, Reay said, particularly from China. Hotels are seen as a safe investment, and he’s seeing buyers coming out of other commercial sectors because they’re seeing returns on hotels higher than what they could get in apartment buildings, for example.

With major markets doing well following the recession, Reay said, the secondary markets are now receiving some attention as well. Investors are seeing those as under-tapped markets.

Even older assets in tertiary cities have higher asking prices, Hiser said. The asking prices for some select-service hotels are as much as five times their revenue, he said.

“That’s extremely high in my opinion,” Hiser said.

Looking back to see ahead
Looking back, 2006 was a record year in terms of build volume in the state, Reay said, and when the industry reached its peak, it dropped off in 2007 and 2008. Once the recession started, he said, the state saw record lows in sales—less than $1 billion—and fewer than 80 transactions. The California hotel industry has been climbing out of that drop for the past six years, he said.

The question that inevitably comes up is where the industry is in this cycle, he said. In reviewing past surveys, 2015 almost matches 2006, he said. While that leads to the question of whether 2016 or 2017 will be the next 2009, he believes the current market is a little different than it was six years ago.

“We had a lot of new supply in the marketplace,” he said. “That’s just not happened here in the last four to five years. With the current pricing, the development pipeline in California is getting cranked up. There are a lot of projects on the books. A lot of supply (will be) added in the coming years.”

Many in the industry believe the peak is coming, if it hasn’t already, Reay said, and that’s what he also believes is spurring some of the larger transactions. Once the cycle hits its peak, Reay doesn’t see a downturn as drastic as in 2009. The RevPAR declines during the recession hadn’t been seen since the Great Depression, he said, and it was an “absolute catastrophic crash.” The last recession came about because of the crash on Wall Street and a liquidity problem, but he thinks the federal government has a better handle on that now.

“I see it as a gradual flattening out,” Reay said. “Outside of some huge recession or worldwide recession, I just see this as flattening out.”

Riser agreed with Reay’s assessment, saying the downturn likely will be slower and less dramatic. The stronger economy and fundamentals are driving the marketplace here, he said. It depends on what is the shock that will cause the shift in real estate prices from escalating the way they are.

“We’re about five to six years into the recovery, which is typically how long they last,” he said. “There’s bound to be some type of correction.”