Pandemic Causes Record Decline in California Hotel Property Sales

Pandemic Causes Record Decline in California Hotel Property Sales

Loan Distress for Some Owners Could Create Rare Bargains for Future Buyers

California hotel property sales are on track to have their lowest year ever, following a record decline in sales as the coronavirus pandemic stalled tourism and real estate activity.

The dollar volume of hotel sales in the state dropped by an unprecedented level of more than 80% year-over-year in the pandemic period of April to June, according to brokerage and research firm Atlas Hospitality Group, which primarily tracks California hotel property trends.

“With a large number of hotels closed down and occupancies and room rates at record lows, no one has ever experienced a market like this before,” reads an Atlas report.

The sales decline in the early months of the pandemic contributed to pushing total sales dollar volume for the first half of the year down more than 53% from a year earlier, according to Atlas.

That’s the steepest decline Atlas has reported for the first six months of the year since 2009 when the number of sales fell 51% year-over-year and the dollar volume dropped 80.3% during the last economic recession.

The financial challenges facing the hospitality market that contributed to the sales decline also set the stage for a potential wave of distressed-property purchases in the coming year as hotels in the nation’s most high-demand hospitality market get taken over by lenders or otherwise get placed up for sale at bargain prices.

“There are a number of distressed-property funds ready to jump into the market, and they anticipate a wave of hotel foreclosures starting in 2021,” said Alan Reay, president of Atlas Hospitality Group.

Reay told CoStar News his company is currently tracking 140 California hotels that have defaulted on loan payments, amid coronavirus pandemic conditions that have seriously diminished tourism and business travel statewide, causing occupancy and room rates to hit record lows.

While many conventional lenders are working with hotel property borrowers and deferring payments, Reay said defaults are increasing for loans financed through commercial mortgage backed securities. Some properties could end up with new owners finding relative bargains in the coming year, though it could take several months for pricing and other true upshots to emerge.

“With so few sales, lenders, appraisers and more importantly buyers are struggling like never before on where to value hotels today,” Atlas Hospitality researchers said in new mid-year California report.

Fundamental Declines

Many hotels statewide currently remain either closed or operating at reduced capacities. According to travel research firm STR, a CoStar Group company, Orange County’s hotel occupancy for the first seven months of 2020 stood at 46.4%, with Los Angeles and San Diego counties both at 50%. All well below the mid-70% to mid-80% occupancy rates that would normally be seen in those coastal regions.

Most California markets this year have seen concurrent drops in daily room rates and revenue, two key metrics that influence development and investment activity.

New California hotel construction is down significantly this year, and similar trends are surfacing nationwide, creating a dearth of available lending options to close hotel purchase and development deals.

But an overall buyer-leaning hotel investment climate for those with funding resources was cited, for instance, in the recent sale of the vintage hotel known as The Georgian, where a group of Los Angeles investors found a rare acquisition opportunity in the normally tight hospitality market of coastal Santa Monica, California.

The Atlas report noted that total dollar volume for California hotel sales was down 53% in the first six months of 2020, as 114 properties sold for $955.4 million, with the number of deals down 21%. But for the April-June period, after pandemic-related factors kicked in, the dollar value dropped 82% to $154 million and the 32 transactions amounted to a nearly 45% decline.

The last plunge in dollar volume approaching the current magnitude occurred in the first half of 2009, after the start of the Great Recession, when sales dropped 80.3% from the year-earlier period.

In that April-June period, dollar volume was down 66% from a year ago in Los Angeles County, 97% in San Diego County and 99% in Orange County, the state’s largest percentage decline according to Atlas. San Francisco’s drop-off was 81%.

All of those regions, pre-pandemic, would normally be enjoying their peak mid-year hotel room demand metrics spurred by summer tourism and business travel generated by industries including technology and media production, which had kept new California hotel development and property sales going strong for much of the past decade.

“We are forecasting that 2020 will be the worst year on record for hotel sales, and the longer this pandemic continues it will be a very long, uphill battle to recovery and a stable market,” Atlas researchers said.

California’s biggest hotel deal by total price during the first half was the $117.5 million purchase of the 355-room Hilton San Jose in Santa Clara County, acquired in January by GEM Realty Capital of Chicago. Hotel sales dollar volume in that tech-heavy region, home to Silicon Valley, declined just 14% in the first half from a year ago, though the number of transactions stayed the same at four, Atlas reported.

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