California’s Hotel Sales Dip Doesn’t Tell Whole Story
By Bryan Wroten
IRVINE, California—The number of individual hotels sold in California during the first half of 2018 dropped by 35% year over year, according to Atlas Hospitality Group’s midyear California Hotel Sales Survey.
During the first six months of 2018, there were 134 individual sales, down from 206 from the first half of 2017, making it the third lowest total recorded in the past 10 years. While the total dollar volume declined by 28%, the median price per room increased by 11%. Sacramento and San Francisco counties were the only submarkets that had an increase in the number of sales.
Despite the drop in pace and volume, Atlas President Alan Reay said there’s no need to worry too much about comparing 2018 numbers to the record year that was 2017. The transaction market in California appears to be normalizing, he said.
Reay outlined five points to keep in mind about the latest California hotel sales numbers.
1. A 35% sales drop isn’t necessarily bad
While the drop-off since the pace in 2017 “has been extreme,” Reay said he would avoid looking too much into it. Last year was such a phenomenal year for sales, a drop of 35% in individual transactions actually brings the state transactions market back to a normalized amount, he said, which is more in line with sales in 2015 and 2016. He added he doesn’t expect the sales pace to increase in the second half of 2018.
“It would be more concerning if we were seeing a decline in prices,” he said. “The median price per room is up 11%.”
There were so many hotels sold last year, what the industry is seeing today is the inventory that’s left, he said. Anyone looking to sell already closed their deals last year.
2. Many owners are holding onto their properties
The Sonoma area is a desirable market, Reay said, but it had zero sales during the first month. Owners there are holding on to their properties because they’re happy with their hotels and their performances, he said.
The prime markets won’t offer many transactions this year, but there should be some action in the secondary and tertiary markets, such as Inland Empire and Coachella Valley. The transaction survey dovetails with Atlas’ recent development survey, which shows smart money looking at areas without much new supply coming in, he said.
“There’s definitely a spike in terms of those properties coming to market,” he said.
Many owners are choosing to refinance their hotels instead of sell. Atlas is starting to see owners refinance with long-term commercial-mortgage backed securities debt instead of working out a 1031 exchange, he said.
3. Foreign investment has dropped
Dollar volume is down because there were fewer larger transactions this year, Reay said, which isn’t a surprise to anyone because there had been a tremendous amount of investment coming from mainland China. Companies such as Anbang Insurance Group and others have changed from being buyers to being net sellers, he said.
“That took a very, very large buying component out of the marketplace, especially in the luxury segment,” he said.
4. Realistic pricing is important
California is still a sellers’ market if owners price their property properly, Reay said. There’s still a lot of hype in the market, so too many owners have put their property on the market with prices that make no sense, he said. If the seller then decides to lower the price, all of the high-probability buyers have seen the property and moved on.
“It’s the same as elsewhere: You have to be realistic, know which way the market is moving, what financing will look like on the deal and what’s going to be the cost,” Reay said. “I’ve seen a lot of deals made only to fall out because transfer of ownership (property-improvement plan) was more than what the buyer might have budgeted.”
5. Buyers need to know the market
Buyers from out of state are frequently surprised by the transaction market in California, Reay said. There are higher multipliers on room revenue and much lower cap rates compared to what they would find in other parts of the country.
“When the buyers see that, quite honestly they’re shocked,” he said. “It makes it very difficult for out-of-state buyers to come in because there’s so much money sitting here with existing California owners, who know the market and can move much quicker.”
Buyers familiar with California know there can be multiple offers for one deal, so they shorten their due diligence time—or don’t perform due diligence at all in some cases—in order to win the bid, he said.