CoStar
08/13/18

San Diego, Orange Counties Join Statewide Drop in First-Half Hotel Deals
Mid-Year Market Update: Both Regions Saw Property Sales Decline Despite Still-Strong Performance, Development
By Lou Hirsh

https://product.costar.com/home/news/shared/194298
On the heels of a record year of hotel sales, Southern California’s San Diego and Orange counties experienced sharp declines in the number and value of hospitality property sales completed in the first half of 2018, according to a new report.

The two counties reflect the plunging sales pattern that has happened across nearly the entire state of California so far this year, even amid continued strong operating performance and development activity for hotels in local markets.

The report from brokerage and research firm Atlas Hospitality Group cautions that this isn’t a sign of an industry in freefall. Instead, California hotels have a tough act to follow in 2018, since 2017 was a record year for hotel property sales.

“In many respects, the drop in transactions shows the market taking a breather from the heights set in 2017,” the Atlas report said. “It very much remains a seller’s market.”

Atlas Hospitality Group showed California posting a 35 percent drop in the number of hotels changing hands in the first six months of the year over the same year-ago period, while San Diego declined 41 percent and Orange County fell by half.

The state recorded 134 sales from January to June, compared to 206 in the same months last year.

The amount of money spent on those Golden State hotel transactions was down 28 percent, to $2.3 billion. However, the hotels that did trade were pricier. The median price per room on those deals was up 11 percent, at more than $115,000.

Declines were generally steeper for San Diego County. The county, which saw its hotel deal count decrease 41 percent, reported 10 sales in the first six months. The total dollar amount spent on the deals dropped 77 percent, to $86.2 million.

San Diego’s two biggest hotel deals of the first half of 2018 involved the 169-room La Quinta Inn & Suites in Mission Valley and the 86-room West Inn & Suites in Carlsbad, each of which sold for $19.5 million, according to CoStar data.

But unlike the state, the San Diego region also posted declines in the average and median price per room across completed transactions.

Just to the north, Orange County saw a 50 percent decline in the number of first-half hotel deals, clocking just eight completed sales, versus 16 a year ago. Capital spent on the hotels plummeted 59 percent to $152.9 million. The 376-room Wyndham property in Garden Grove, which sold for $61 million, was Orange County’s largest hotel deal of the first half of this year.

These sales results follow an earlier Atlas report, showing that San Diego and Orange trailed only Los Angeles County for the number of hotels currently under construction or in planning as of mid-year.

Atlas President Alan Reay said he’s expecting San Diego and Orange County hotel sales dynamics to remain as they are for the rest of 2018, with a continued leveling-off in activity next year. But he doesn’t anticipate that recent sales patterns will impact hotel developer appetites, which remain strong.

One reason is the still-rising per-room prices in the recently-completed California deals.

Another is that Southern California hotel performance metrics, including occupancy and room pricing, remain historically strong, thanks in part to a nationwide travel economy that is still humming on both the leisure and corporate sides, along with group meetings and convention business.

First-half data from travel research firm STR showed San Diego County hotels topping $1.4 billion in revenue, up 4.1 percent from a year ago, as the occupancy rate reached 79.1 percent. Orange County hotels reached nearly $1.3 billion in revenue, up 4.4 percent, with occupancy at 76.9 percent.

“As we are seeing prices still climbing up, this will help spur new hotel development in the near term,” Reay said via email. “The big test will be if we see revenue per available room (RevPAR) flattening out or falling; that will really impact new projects and how lenders and buyers view hotels.”

Atlas reported that Sacramento and San Francisco counties were the only two California regions posting year-over-year gains in sales transaction volumes for the first half. San Francisco led the state in dollar volume, with more than $652.4 million generated by eight deals.

Reflecting the historical strength of 2017, Los Angeles County by far led Southern California with its $262.7 million in hotel sales completed during the first half of 2018, but even that was down 66.3 percent from last year’s first-half tally of more than $779.8 million.

In fact, Los Angeles’ 14 deals marked a 46 percent drop from a year ago.

Researchers at Atlas, which primarily tracks hotel deals valued above $5 million, said California properties available at market prices are still being snapped up in the current market, often with competing multiple offers.

Looking ahead, Atlas said investors and developers should keep an eye on interest rates, which could impact future purchase patterns, especially in transactions involving variable-rate loans tied to the prime rate. Reay said long-term, fixed-rate loans have yet to move up substantially in the current climate.