Thursday, August 20, 2020
By Thor Kamban Biberman
Newly completed hotels are opening into a pandemic-fueled recession, while those that were planning to begin construction may be thinking about building in another asset class entirely.
Atlas Hospitality Group president Alan Reay, whose firm just completed a mid-year hotel construction survey, said numerous new hotels have postponed their openings, while many hotels remain closed.
“Over 40 percent of hotels in San Francisco are closed,” Reay said, adding that Anaheim is another city that has been particularly hit hard by the pandemic and hotel closures. “Some projects are being abandoned if they weren’t already under construction.”
New hotel construction in California has tempered quickly from the record-setting pace set in the first half of 2019.
The number of hotels under construction decreased 17.1 percent (from 234 to 194), and the number of new rooms under construction declined by 19.9 percent, according to Atlas Hospitality. Thirty-five hotels opened in the first half of 2020, just one less than 2019, but with 22.5 percent fewer rooms.
The number of new hotels and rooms in the planning stages statewide increased 9.0 percent and 5.7 percent, respectively. There were 1,246 California hotels being planned midway through 2020, compared with 1,143 last year.
Given the current state of the economy, it is unclear how many of these will actually be built.
“The onset of the coronavirus pandemic and the huge impact it has had on the hotel business not only in California but throughout the U.S., has resulted in many planned projects being deferred or abandoned all together,” Atlas Hospitality stated.
Reay said it is “mind-blowing” to consider how strong the hotel market was a year ago compared with how vulnerable it is today. He added “there is going to be some repurposing going on,” such as transforming hotel plans into residential.
“A number of new hotels that have been completed have simply delayed opening while others under construction are not pressuring their contractors to complete,” Atlas Hospitality stated in its report. “We have also seen a number of hotels under construction default on their construction loan and enter into foreclosure/bankruptcy.”
San Diego County added four hotels through June 30. The largest was a 142-room Homewood Suites in Carlsbad.
Other area hotels that opened by June 30 included Morris Cerullo’s 126-room Legacy International Center in Mission Valley, a 100-room Hampton Inn & Suites in Imperial Beach, and a 90-room Hampton Inn & Suites in El Cajon.
A total of 11 hotels, consisting of 1,238 rooms, are under construction in the county. The 226-room SD Malkin’s Destination Hotel Resort (also known as the Oceanside Beach Resort in Oceanside) is the largest under construction. A 158-room Boutique Hotel is also planned at this location.
There are 100 hotels in the planning stages in the county, marking a 2 percent year-over-year increase. But the number of local hotel rooms being planned declined 9.8 percent year-over-year to 16,125 rooms.
In the Inland Empire, seven hotels with 986 total rooms opened in Riverside and San Bernardino counties. The largest was the 131-room Element Hotel in Ontario.
Riverside County has 11 hotels with 1,248 rooms under construction, including the 250-room Hotel Indigo Coachella. San Bernardino County has seven hotels with 879 rooms under construction, led by the 451-room San Manuel Casino Hotel in Highland.
Riverside County has 100 hotels with 14,392 reported rooms in planning. San Bernardino County has 49 hotels with 4,368 rooms in planning.
While no one can forecast just how long this pandemic will last, Atlas said it is clear the effects on California’s hotel business will be felt for many years.
The vast majority of hotel projects in planning will simply not get built, according to Atlas.
“Developers are already looking at other uses, namely residential,” the report stated. “For those developers that still want to move forward with new hotel development, they are going to find it virtually impossible to find lenders willing to provide construction financing.”
If there is any good news, existing California hotel owners can be a little less concerned at least about a wave of new supply.
Existing hotel owners who have managed to stay open continue to suffer, however. Reay cited a Smith Travel Research survey that found the average occupancy in downtown San Diego hotels is still only about 10 percent.
Such ugly occupancy rates mean many hotel owners can’t begin to pay back their lenders.
Reay said CMBS (Commercial Mortgage-Backed Securities) loans that had a 1.34 percent delinquency rate nationally in July 2019, had an average 23.4 percent delinquency rate last month.
The delinquent CMBS hotel debt-by-dollar volume tells a similar story. That figure had been about $1.15 billion as recently as December of 2019. The delinquent dollar volume reached approximately $20.6 billion by this July.
“The highest figure in the peak of the financial crisis was $13.5 billion,” Reay said.
Reay, who will be publishing a report specifically addressing hotel sales next week, said the hotel sale dollar volume is running at about 90 percent below normal, and when hotels have sold, they may have been purchased for a fraction of their last assessed valuation.
“There was as 30-room hotel in Hollywood that was appraised at $13 million in December 2018. It sold for $4.65 million about five weeks ago,” said Reay, adding that he would be hard pressed to find a more difficult market for sellers than this one.