Investors are not in a hospitable mood as trade value drops by 56%.

By Jack Rogers | February 15, 2024 at 06:53 AM

Investment sales in hotels plunged by more than 56% in California in 2023 as investors kept their powder dry waiting for better market conditions—the steepest cliff-dive for the hospitality sector in the Golden State since the global financial crisis.

Hotel transactions in California totaled $3.76B last year, less than half of the $8.6B in hotel sales volume in 2022. The 2023 tally is the lowest since 2009, when sales of hotels in the Golden State dropped by 75%.

The plunge in hotel sales was more pronounced in Southern California, which saw its 2022 total of $5.8B pared to $2.3B in 2023. Sales in Northern California dropped to $1.45B last year, compared to $2.8B the previous year, according to the annual California Hotels Survey from Newport Beach-based Atlas Hospitality Group.

The contraction looks worse when you consider the fact that SoCal’s total includes a $760M transaction: the foreclosure sale of the Fairmont Century Plaza Hotel.

The largest deals in Northern California included a May transaction in which Redwood City-based Ohana Realty bought the 276-room Claremont Hotel Club & Spa in the Oakland and Berkeley market for $163M, or about $591K per room.

In October, Throckmorton Partners bought Signia’s 264-room Signia by Hilton’s South Tower in downtown San Jose with plans to convert it into student housing for San Jose State University. EOS Investors in October paid nearly $69M, or about $310K per room, for the 221-room Hotel Zoe in San Francisco’s Fisherman’s Wharf.

The retreat of lenders from CRE markets, which has seen transaction volumes drop across market sectors nationwide, was exacerbated in Southern California by the new property transfer tax that went into effect in Los Angeles in April.

In the 10 months since Measure ULA went into effect it’s become clear that the transfer tax has been a significant drag on property transactions in Los Angeles, with many local developers looking to do more work outside of Los Angeles because of the measure.

Measure ULA, which stands for United to House L.A., is a tax on all real estate sold at or above $5 million in the city. The tax received 58% of voter support to pay for new homeless support, requiring sellers of properties valued at $5 million to $10 million to pay a 4% tax to the city and sellers of properties at or above $10 million to pay 5.5%.

Measure ULA has impacted investment sales across all asset types, The city has collected only a fraction of the $900M in tax revenue promised by proponents who put it on the ballot.