HOSPITALITY: 510 Transactions Total $8.6B in 2022

BY: KAREN PEARLMAN
APRIL 6, 2023

After a record year in 2021 with 510 hotels transacted, buyer demand for hotels in California remains strong.

The Newport Beach-headquartered Atlas Hospitality Group reports in its 2022 Year-End California Hotel Sales Survey, that last year marked the second-highest number of individual hotel sales at 483, down just 5.3% over 2021.

Alan Reay, president of Atlas Hospitality Group, also reported that sales were at their third highest in dollar volume at $8.598 billion, with a new record for median price per room at $151,636. Reay reports that is up 10% over the record set in 2021.

Reay said that at midyear 2022, experts actually had predicted a slowdown in the second half of the year with what was happening with interest rates, “but that simply didn’t happen.”

“That tells us that buyer demand for hotels in California remains very strong,” he said.

San Diego County had a 30.6% decrease in individual transactions, from 49 to 34. Total dollar volume was down 33%. The county’s average price per room increased 15.4%, while the median price per room decreased by 4.2%.

Atlas reports that the 417-room Hyatt Regency La Jolla was the largest local hotel sold, and the highest price paid at $216.3 million.

Overall in the state, the highest price sale was $641 million paid for the 260-room Montage Resort Hotel in Laguna Beach.

The largest hotel sold was the 573-room Four Points at Los Angeles Airport. The highest priced sale was the $189.7 million for the 350-room Westin Hotel Pasadena.

Certified Hotel Administrator, managing partner at Hilton Campus Del Mar and Fairfield Inn & Suites San Marcos, said that because the cost of financing is typically 70% of the total cost, some of Atlas’s insight on the findings did not jibe with him.

Rauch said he didn’t fully agree that it seemed that there is “a large pool of buyers who are willing to purchase quality California hotel deals at prices at or below the cost of financing” and that the lack of new supply of hotels “combined with upward inflationary pressures are some of the main reasons buyers remain extremely bullish on California hotel investments” did not seem “bullish” in his view.

Rauch said, however, that he predicts that San Diego, as well as several other primary California markets, will likely see a large number of transactions occurring in the next 12-18 months. “The combination of strong pricing that hotel owners will like and the difficulty of refinancing their current loans will cause many hotel owners to opt for a sale,” Rauch said.

Many hotel owners have commercial mortgage-backed securities loans – 10-year loans that were mostly offered during 2013-14, he said.

“The interest rates were in the 4-5% range and those rates do not exist today,” Rauch said. “If they choose to refinance, they start paying high interest rates. Some will opt to do that; others will sell and take the profits and tax hit.”

At the end of the day, both Reay and Rauch agree that the San Diego hotel market is strong and will see continued growth in both occupancy and rates based on the return of corporate business and group/convention business, the continued mindset of the leisure traveler that, Rauch said, “traveling is a birthright” and the long-awaited return of international travel.

“Additionally, there is a favorable balance of supply and demand as new supply remains very muted due to the pandemic behind us and high interest rates on new construction loans while demand grows by several percentage points,” Rauch said.

Reay said San Diego is showing a tremendous demand for assets, including buyers coming in looking to convert hotels for alternative uses such as housing for homeless individuals. And also, buyers continue to look toward purchasing hotels to convert to apartments, which comes at less of an expense than starting – literally – from the ground up with new construction.

Reay said those buyers are typically less sensitive to interest rates.

While many hotels in Los Angeles, San Francisco and San Jose took a hit during the pandemic, San Diego’s downtown market has remained strong, Reay said. The city has a diversified economy, making it attractive to those looking to invest, and visit.

“San Diego is not heavily dependent on one industry,” he said. “People love San Diego, let’s face it. If you’re looking for a meeting, you want to go to San Diego. It’s been known for the Navy and defense, but it’s also got everything from the weather and climate to the proximity to Mexico, life sciences and high tech, and it’s got the Gaslamp District … it sort of checks all the boxes. San Diego is always a great investment.”