By Caroline Petrow-Cohen | Staff Writer | Sept. 12, 2024 9:14 AM PT

Hotel sales are flagging in Los Angeles County and throughout the state as high interest rates and smaller-sized deals have been a drag on the market, according to a recent industry report.

During the first six months of the year, the number of hotels that traded hands in L.A. County dropped 6% compared with the same period last year, while the amount of money involved in the sales plummeted 79%, the report by Atlas Hospitality Group concluded. A lack of big-ticket transactions accounted for the steep dropoff, said Alan Reay, president of Atlas Hospitality Group.

“What we saw in the first six months of 2024 versus 2023 is a lot smaller transactions,” Reay said in an interview. “There were no trophy or bigger full-service hotels that closed in the first six months.”

California is home to about 10,000 hotels and used to see roughly 400 to 450 hotel sales per year. In the first six months of 2024, there have been 122 sales.

“It’s substantially below what we typically see in a normal year for California,” Reay said.

Across the states, hotel sales have been declining over the last two years, Reay said. Statewide, the total volume of transactions is down 48.5% from the same period last year and the number of individual sales is down 1.6%, the report found.

“It’s primarily due to how rapidly the interest rates have increased,” Reay said of the decline in sales. “We went from being able to get loans for hotels in the low 4% range to well over 8% if you could get them,” he said.

Donald Wise, co-founder and chairman of Newport Beach-based Turnbull Capital Group, said increased interest rates have affected a variety of owners in the California hotel market.

“Interest rates have been very painful across the board, whether you’re trying to refinance or you have a loan coming due or if you’re currently building a hotel,” he said.

There’s also a disconnect between what sellers and buyers are valuing hotel properties at, the Atlas report said.

The priciest hotels in California can sell for more than $700 million — the Fairmont Century Plaza Hotel in Los Angeles sold in 2023 with a transaction value of $720 million. But in 2024 in Los Angeles County, the most expensive sale so far is the 168-room Residence Inn in Manhattan Beach, which sold for $68 million.

Outside Los Angeles County, trends vary but remain bleak. Individual hotel sales in Orange County are down 50% in 2024 comparedwith the same period last year, but dollar volume is up 4.7%. In San Francisco County, individual sales were flat and dollar volume decreased 51%.

Another factor discourages the sale of large, valuable hotels in Los Angeles specifically, Reay said. Passed by ballot initiative in 2022 and enacted in April 2023, the “mansion tax” places an additional 4% tax on real estate transactions of more than $5 million and adds a 5.5% tax on transactions above $10 million.

The mansion tax may make large property owners more hesitant to initiate a sale, Wise said, but it’s become the reality in Los Angeles.

“The bottom line is, it’s not going to go away,” Wise said. “It’s not like you can wait a year and it’s not there. It just means that you’re going to have to weigh your options more heavily.”