HotelNewsNow
09/01/16

California Hotel Sales Drop Severely After Record Year
By Sean McCracken

http://www.hotelnewsnow.com/Articles/67458/California-hotel-sales-drop-severely-after-record-year

REPORT FROM THE U.S.—Hoteliers across the state of California have seen a steep drop-off in transactions through the first half of 2016 after a record-shattering 2015, according to research from Atlas Hospitality Group.

Alan Reay, president of Atlas, said a combination of three factors led to a 56% year-over-year decline in total-dollar-volume transactions: Tough numbers to compare to in 2015, a first quarter stock market slowdown and a shift in pricing leading to a gap between buyers’ and sellers’ expectations.

“The first quarter was very, very ugly in terms of transactions, and people didn’t know what direction the market was heading,” Reay said. “The second quarter picked up again, but if anything sums up the first six months, it’s that buyers were very cautious.”

In addition to the drop in dollar volume, California saw a 17% drop in individual transactions. The drop looked even bleaker in just the first quarter, when dollar volume fell 60% and transactions fell 42%

Reay said inactions by real estate investment trusts and a corresponding dip in portfolio sales played a big part in the numbers falling.

“REITs’ stocks plummeted … so the economics just didn’t make sense,” he said. “And there was not a huge amount of other buyers.”

Mark McDermott, SVP at the San Francisco office of CBRE Hotels, agreed that a dip in portfolio sales is having an effect, much like it is across the U.S.

“We’ve seen a slowdown nationally, which is mirrored within the state of California,” he said.

He said a number of factors, including the U.K. Brexit vote and uncertainty around interest rates, fueled investor concerns in the first quarter, which lead to “an extreme slowdown.” But those bad numbers won’t linger through 2016.

“We expect the market to be more active (in the second half of the year) than the first half,” McDermott said.

He also noted that a lack of financing negatively affected sales volume.

“That was definitely an issue in the first half of the year, particularly with (commercial mortgage-backed securities) debt,” McDermott said. “But in the next six to 12 months, we’re actually pretty optimistic about available financing.”

The largest transaction of the first half of 2016 was the $197-million sale of the mixed-use Vintage Estate in Napa County, which includes the 80-room Vintage Inn and the 112-room Villagio Inn & Spa.

Despite the slowdown in transactions, another recent Atlas survey showed California continues to experience strong hotel development.

The impact of foreign investment
Paul Nussbaum, founder and chairman of Waramaug Hospitality, said interest from foreign investors—primarily from Asia—in gateway markets like San Francisco and Los Angeles has thus far been a saving grace for California.

“I don’t think Chinese buyers are limited to California, but the natural first place they’re attracted to is the West Coast,” he said.

After a year of sharply spiking prices, Nussbaum said California’s hotel market seems to have moderated into “fair and intelligent market pricing.”

But Mark Crisci, chief investment officer and principal at Azul Hospitality Group, said it’s not time to go bargain hunting.

“Everybody is still holding pretty firm,” he said.

And he said the dynamics in the market could soon see a shift.

“We’ve had some institutional guys on the sidelines, but we’re starting to see evidence of the REITs coming back,” he said. “That vacuum was filled pretty quickly by some aggressive private equity sources who saw they could compete a bit harder for some assets.”

Crisci said many were able to hold on pricing because of the continued strong performance metrics for hotels across the state. The sales survey noted median price per room rose 11.3% year over year.

McDermott said foreign capital sales are buoyed by a “low or negative interest rate environment in much of the world.”

“That capital will continue to flow into the U.S. and target California more so than other parts of the country,” he said.

Key markets
While Northern California saw transactions fall 32%, transactions volume was virtually flat in Southern California during the first half with just a 1% increase, according to Atlas’ research.

Los Angeles County still had a high number of deals as transactions jumped 30%, but total dollar volume fell 32% and average price per room fell 38%.

San Diego County saw transactions fall 38% with dollar volume down 65%. San Francisco County saw a single hotel sale in the first half of the year—the $126-million sale of the 348-room Club Quarters Hotel—marking an 88% drop in transactions and a 90% drop in dollar volume.

Sacramento County and Alameda County were bright spots, which reported 250% and 200% increases in transactions, respectively. Sacramento County saw a 484% increase in dollar volume, headlined by the $38.5-million sale of a 448-room DoubleTree property.

Crisci said it’s important not to paint all of California with one broad brush.

“The state is so big with so many different (areas) that you can’t really lump together,” he said. “There’s tons of interest in San Francisco and demand levels hit new heights each year, while San Diego is still kind of a good market but has some supply concerns. There are just different opinions from one market to another.”