Northern California Hotel Market Continues to Favor Sellers
By Meghan Hall
The San Francisco Bay Area remains one of the country’s top tourist destinations in the country, making its hotel market one of the healthiest in the nation. 2017 was one of the strongest years on record for hotel sales and development over the past two decades, and investors remain bullish and eager to enter the Northern California hotel market. Although, hotel sales within the state of California have decreased significantly through the first half of 2018, a new report released by Irvine, Calif.-based Atlas Hospitality Group indicates that the hotel market will hold stable long-term.
As a whole, California saw a 35 percent decline in the number of hotel transactions during the first six months of 2018; there were 134 individual sales compared with 206 during the same period in 2017. Atlas Hospitality states that this is the third-lowest total in the past ten years and one of the most drastic declines recorded since the 2007 recession, when transactions dropped by 44 percent between 2007 and 2008 and 51 percent between 2008 and 2009.
Only two counties in California posted increases in hotel sales during the first half of 2018: Sacramento County and San Francisco County; the counties saw increases of 50 percent and 33 percent, respectively. Alameda County’s individual sales declined by 25 percent, a smaller rate of decline than many other counties in Southern California.
Sonoma County has yet to see any sales this year, as the area is still working to recover from several large fires that destroyed numerous homes and businesses in the fall of 2017. The Fountaingrove Inn, a 124-room hotel and the Hilton Sonoma Wine Country, a 250-room hotel, were just two of the more than 1,500 structures burned in the blazes.
Atlas Hospitality’s President Alan Reay stated that the decline in individual sales is simply the market returning to its regular levels after a record-breaking year in 2017, and that hotel values are still increasing.
“2017 was a record year and had the highest number of transactions in a single year since we have been tracking sales,” said Reay. “2018’s first half is just getting back to a “normal” level of transactions.”
Atlas Hospitality notes that hotels on the market are quickly bought and usually have several competing offers. The sale of the 668-room Grand Hyatt in San Francisco by Hyatt Hotels Corporation to Host Hotels and Resorts for $575.4 million was announced in February 2018. It is the largest and most expensive sale of the year so far in Northern California.
The most expensive transactions in Sacramento County and Alameda County were the 126-room Residence Inn Sacramento Airport Natomas, which sold for $23.5 million, and the 175-room Aloft Silicon Valley in Newark, which sold for $47.5 million.
This trend has yet phased developers, as the number of new projects in the pipeline is expected to exceed 2017 levels. 26 hotels opened throughout California during the first six months of both 2017 and 2018, and the number of hotels under construction increased substantially. In 2017, there were 130 hotels in the pipeline, while in 2018 there are 183, an increase of 41 percent.
The number of hotels currently in the planning stages has also increased. At the end of the second quarter of 2018, there were 959 California hotels in planning, compared with 773 at the same point in time last year.
Northern California overall continued to see increases in hotel construction and planning. 11 hotels opened in the region during the first half of 2018, with the largest being the 250-room Hotel Nia located in Menlo Park. The smallest hotel to open was the Lodge at the Presidio, located in San Francisco proper, which as just 42 rooms.
Mid-way through the year, Northern California has 80 hotels under construction, 17 of which are located within Santa Clara county. The county with the next highest number of hotels under construction is Sonoma County, which has six hotels currently in the pipeline.
There are also 399 hotels currently in planning throughout Northern California, up from 307 over the same period in 2017. 53 of these are in Alameda County, 24 are in Santa Clara, nine are in Sacramento and three are in Sonoma.
Atlas Hospitality expects these trends in development to continue for the next 18 to 24 months and that the long-term outlook for the health of the hospitality market remains positive.
Despite the increases in development, Reay expects the market to continue to favor sellers, as rising construction costs and high barriers to entry in the Northern California market will keep development in check.
“As long as fixed interest rates remain low and RevPARs continue to increase above the cost of inflation, we see it as a seller’s market,” said Reay.