The Registry
08/30/17

Hospitality Market in California Retains Its Shine
By Michele Chandler

http://news.theregistrysf.com/hospitality-market-california-retains-shine

Hotel sales surged in California during the first half of the year, according to a recent industry report.

A shortage of strong alternative investment opportunities and attractive terms are fueling a spike of first-time investors in California hotels, including investors from as far away as China, according to the Atlas Hospitality Group’s 2017 Mid-Year California Hotel Sales Survey.

While the median sale price per room “has pulled back slightly from 2016,” the report said, “there is no let-up in buyer interest.”

Statewide, the average cost per room went down nearly 3.5 percent, to $151,266, while the median price per room decreased 3.1 percent, to $103,586.

“What we’re finding across the board is a lot more transactions, but a lot more of the lesser-priced transactions than what we saw for the first six months of 2016,” including fewer high-end, or “trophy,” hotel sales, said Atlas President Alan Reay.

But California also saw a record 206 individual hotel transactions through the first six months of year, according to the report. The previous high of 187 transactions was set in 2014.

The mid-year total dollar volume of $3.23 billion was the second highest on record for the state, with “quality” hotel offerings generating multiple offers, said Irvine, California-based Atlas in its report released late last month.

Reay added that “a lot of first-time buyers are getting into the hotel business” after selling apartment buildings they own. Those first-time buyers “are looking at selling their apartments at record prices and being able to move into the hotel sector and get better returns,” said Reay.

In many cases, he said, those first-time hotel buyers are selling their apartment holdings “at less than a four percent return for capitalization rate, and they’re buying hotels at seven to eight percent” capitalization rates.

Chinese investors are another emerging segment that has been buying high-end hotels in recent years, as China’s economy slows and the country’s companies have been looking to diversify their assets beyond their home market. With less new hotel construction going on in California compared to other states, investors consider purchasing California hotels to be “safe havens,” said Reay.

However, as Beijing has taken steps to stop China’s massive insurance companies from buying hotels in the United States, “a different side of the Chinese investor” has begun investing in California hotels, Reay said. “We are seeing a lot more individual investors bringing money over from China,” he said.

According to the Atlas report, Northern California saw 109 hotel transactions during the first half of 2017, up nearly 68 percent from the 65 transactions reported in 2016.

The average Northern California sale price rose a fraction, to $12.808 million in 2017. However, the average price per room in the region was down 11 percent, to $139,131.

The highest price per room in the entire state went to the 80-room Hotel Yountville in Napa County, which sold for more than $1.2 million. In 2016, Hotel Yountville had 87.8 percent occupancy rate, an average daily rate of $534 and revenue per room of $469, according to media reports.

Atlas’ report said the priciest sale in the state during the period was the $219 million paid for the 305-room W Hollywood in Southern California, where a recent uptick in sales reversed what had been a downward trend for all of 2016.

Transactions in San Francisco County rose 500 percent during the first half of the year, from one to six, while total dollar volume from those sales spiked nearly 170 percent. However, the average price per room was down 34 percent, to $237,868.

The largest hotel sale in San Francisco was the 585‐room Holiday Inn Fisherman’s Wharf, the report said. The most expensive sale was the 383‐room InterContinental Mark Hopkins in San Francisco, which sold for $171.6 million.

Alameda County posted four transactions, down 55.5 percent. However, total dollar volume there increased 72 percent. The average price per room went up 72 percent, and the median price per room rose 174 percent.

The largest and most expensive county sale in Alameda County was the $143 million paid for the 494‐room Oakland Marriott City Center.

Sonoma County transactions rose 600 percent, to seven in 2017 from just one during the comparable period last year. Sonoma also saw a 4,204 percent total dollar volume increase, to $77.90 million.

The largest and most expensive sale reported in Sonoma County was the $40.05 million paid for the 184‐room Sheraton Sonoma County in Petaluma.

The average price per room, however, was down 34.8 percent in Sonoma County, and the median price per room dipped 54.1 percent.