HOSPITALITY: Hotel Transactions Cooling Off in 2022

BY KAREN PEARLMAN | SEPTEMBER 2, 2022

After a record-breaking 2021 for hotel sales in California, including the highest number of individual hotel sales and total dollar volume sales in San Diego County, hotel transactions have cooled off in the state and region in the first six months of this year.

Statewide, the number of individual hotel sales declined by 9.9% and total dollar volume is down 33.6% thus far in 2022, according to Irvine-based Atlas Hospitality Group, which keeps tabs on hotel transactions in California.

Those numbers are part of Atlas Hospitality Group’s 2022 mid-year California Hotel Sales Survey released late this summer.

In San Diego, 25 hotels were sold in the first six months of 2022, compared to 28 sold in the same time frame of 2021, a decline of about 11 percent. The most expensive local hotel sale of 2022 as reported by Atlas was the 126-room Moxy Hotel in downtown San Diego at $46 million; next highest was the 90-room Inn at Rancho Santa Fe at $42.7 million; and third most expensive was the 90-room Courtyard San Diego Gaslamp/Convention Center at $41 million.

Alan X. Reay, president of Atlas Hospitality Group, cautioned it’s hard to gauge fully the mood of buyers and sellers with hotel transactions in the short window of six months, especially with rising interest rates and concern about a recession.
Reay said that although sales cooled off somewhat during the first half of 2022 as compared to the record pace set during the same period last year, it still logged in as the second highest number of sales on record and the third highest in terms of dollar volume.

Atlas reports that the median price per room has increased by 12.7% statewide – up from $127,285 in 2021 to a new California record at $143,443. In San Diego County, however, where individual sales of hotels decreased by 10.7% and total dollar volume was down 41.7%, the median price per room declined by 11.7%.
Comparably, individual hotel sales in Orange County were down 34.5% and dollar volume decreased 16.9% in the first half of the year. The median price per room was up 13.7%. In Los Angeles County through the first six months of 2022, individual hotel sales declined by 21.7% and dollar volume was down 4.5%. The median price per room increased by 24.3%.

The year-end report from Atlas Hospitality Group from 2021 showed individual hotel sales in the state grew 71% over 2020 to a record 510 transactions. Hotel dollar volume hit an all-time high of $9.9 billion last year with a record number of hotels selling for more than $1M per room.

Downbeat Outlook for the Second Half of 2022

Reay said that despite the $63.5 million July sale of the 245-room Courtyard San Diego Downtown Hotel by Marriott (not included in its most recent report that goes through June), moving into the second half of 2022 he predicts a decline in hotel transactions overall. That’s mostly due to the rising cost of debt, higher interest rates, uncertainty surrounding the direction of the economy and a concern over a potential recession.

Hotel properties, traditionally hot commodities in areas of centralized work areas in downtown business hubs, have seen a decline in investor interest part due to the COVID-19 pandemic. Reay said there has been a fundamental shift in remote working as people began increasing the amount of work and meetings at home instead of traveling.

He said it still seems somewhat surprising that where there had previously been “no better market for having a hotel than one in Union Square in San Francisco, that has changed.”

The first six months of 2021 saw motivated sellers looking to get out of the business, “not knowing how long COVID was going to last or how a rebound would look in San Diego” but that “fast forwarding to the first six months of 2022 and being out of COVID, owners are seeing a very sharp rebound… they’re not as concerned as they were last year about what the future holds.”

San Diego ‘Best Long-Term Potential’ in California

Reay said hotel investors looking at San Diego know that the region is strong for commercial business and tourism and has some of the best long-term potential of any region in California. San Diego and other “drive-to” destinations, especially those in coastal areas, continue to see high traffic volume of visitors looking for hotel stays.

There are other factors at play, however, in California where hotels are concerned.
Since 2020, the state has seen fewer lower-priced hotels for visitors traveling on a budget because some of them have been converted into transitional housing for those experiencing homeless. Project Homekey, a passed by Gov. Gavin Newsom in 2020, allows government agencies in the state to buy hotels and motels and convert them into housing.

Reay said that most agencies are paying above market rate for hotels, and that with construction costs so high, “no one can afford to build new budget motels.” He said that “budget travel is being decimated” with hotel supply going down. Taking out the hotel/motel supply hurts cities looking for Transient Occupancy Tax (TOT) as well.

Reay said that one message from the 2022 midyear report is that San Diego hotel owners are more confident about the long-term outlook for the region and thus will be less motivated to sell. Reay also noted that construction costs continue to climb and that investors find that purchasing a hotel cost less than replacements.

Atlas Hospitality Group
FOUNDED: 1997
PRESIDENT: Alan X. Reay
HEADQUARTERS: Irvine
BUSINESS: Brokerage firm specializing in the lodging industry.
EMPLOYEES: Seven
WEBSITE: www.atlashospitality.com
CONTACT: 949-622-3409
NOTABLE: Atlas Hospitality specializes in the sale of California hotels, and since its inception, has sold more hotels in the state than any other brokerage firm.