REPORT FROM THE U.S.—The California hotel industry has seen drops in overall transactions volume that are slightly worse than even the depths of the Great Recession, according to a study from Atlas Hospitality Group.

Through the first half of 2020, sales volume fell 53% year over year, with the number of individual sales down 21% and median price per room down 13%.

Alan Reay, president of Atlas, said those numbers don’t even fully reflect the depths of the crisis.

“When I first looked, it was interesting because I expected the numbers to be down even more,” he said.

The declines are even more steep just in the second quarter, with sales volume down 82%, individual sales down 45% and median price per room down 22%, with Reay noting the price-per-room figure was more resilient because it was based in large part on deals set before the pandemic hit.

The sales volume in comparable to what was seen during the worst portions of the Great Recession, with an 81% drop recorded in 2009, he noted.

At least for the time being, there’s no light at the end of the tunnel.

“In the second half of this year, it will probably be similar to those (second quarter) numbers,” Reay said. “The one area that is somewhat cushioning the blow is the fact that some many lenders on the conventional side—not the CMBS side—are working closely with borrowers on differing payments.”

He said the market is currently at a standstill as anyone who isn’t compelled to sell right now is holding with massive differences in pricing expectations between potential buyers and sellers.

Reay said he did an “impromptu survey” of roughly 100 clients to ask them how pricing in the market right now compares with 2019 valuations.

“The answers ranged between 30% to 70% discounts with most coming in around 50%,” he said. “Anybody who doesn’t have to sell today just won’t sell in this market.”

He expects this bid-ask spread and current market conditions to persists through 2021, which he said would mirror how sellers during the Great Recession were trying to get 2007 and 2008 pricing in 2009.

“It’s hard to figure out where values are today with little to no financing available,” he said.

He said the “vast majority” of potential buyers at the moment are distress funds, but because lenders have been flexible, distress has not been cropping up just yet on a wide scale.

Market-level data
According to Atlas’ mid-year California sales survey, sales figures varied greatly between California’s various markets, but all were down significantly in year-over-year terms.

Orange Country and San Diego County were among the hardest hit, down 99% and 97% respectively, in terms of total sales volume for the second quarter specifically. San Bernardino County, on the other hand, saw a 135% increase, buoyed by the sale of the 131-room Element Hotel in Ontario for $27.5 million.

In Northern California, San Francisco County saw dollar volume decline 81%. Santa Clara County was up 211.1% in volume, pushed upward by the $117.6-million sale of the 355-room Hilton San Jose, the largest deal recorded in the survey.

A buyer’s perspective
BLVD Hospitality recently acquired The Georgian, a boutique hotel in Santa Monica. BLVD Hospitality founder and CEO Jon Blanchard said he’s admired the property for over 10 years and it has been on his radar for just as long. Given the challenges the coronavirus pandemic has created for the industry, he thought the owner might be open to selling. As it turns out, he was right.

“The timing was spot on,” he said. “They had just very recently prior to my phone call made the decision that that was something they wanted to do. I mean, it was days before I called, so very, very fortuitous.”

From the time of the phone call to going under contract, fewer than two weeks passed. Given the current environment, Blanchard’s company was able to acquire it at a discount.

“We wanted to strike quick, and so we did,” he said. “Ever since we put it under contact, we believe there was a lot of folks that were lining up behind us.”

Prior to the pandemic, BLVD Hospitality was looking at different acquisition opportunities, Blanchard said. While the company is still open to buying hotels, it has put a temporary hold on purchasing land for entitling hotels.

For any future buys, BLVD Hospitality is focusing on location, looking for spots that are showing promise during the pandemic. That might be beaches, deserts or other select locations instead of the more city-driven places, he said.

Sellers are more willing now to discount on asking prices compared to a few months ago, and that will be location-specific, Blanchard said. At the moment, buyers will likely hold off until they see some other transactions happen to get them moving again.

“I think the industry as a whole is looking for opportunity,” he said. “I think the industry as a whole is looking for distress.”