Statewide, the decline in hotel sales so far this year is the steepest drop in two decades as lenders shy away from financing multi-million-dollar transactions.

BY LORI WEISBERG

AUG. 17, 2023 5:30 AM PT

San Diego County hotels may be enjoying one of their best years ever as demand for leisure travel continues to ramp up, but that’s not been the case with the hotel real estate market.

Hotel sales during the first half of the year posted their single biggest decline — 48 percent — since 2012 when the number of individual transactions plunged nearly 70 percent, according to Atlas Hospitality Group’s mid-year hotel sales survey. For California as a whole, the downward trend was even more dramatic.

The volume of hotel sales statewide — 124 — is down 53 percent compared with the same period last year, marking the first time in 20 years that such transactions have fallen so low, said Atlas President Alan Reay.

“This is the steepest decline in individual sales we’ve ever seen in the last 20 years of tracking hotel sales. The only year that ever came close to that was 2009 and we remember what happened back then,” said Reay, speaking of the early years of the Great Recession. “The big story is the huge disconnect between what sellers want for their prices and what sellers are willing to pay.”

Blame it on the unrelenting rise in interest rates that has made financing pricey transactions so much more costly.

In San Diego County, there were 13 hotels valued at $200.4 million that changed hands during the first six months of this year. That compares to 25 hotels that sold for a cumulative $362.5 million a year earlier, Atlas reported. This year’s hotel sales were largely mid-level properties, ranging from the 133-room Pala Mesa Resort in Fallbrook to the 68-room Rodeway Inn in San Ysidro.

“The hotels we’re seeing that are still transacting tend to be smaller ones because there’s still financing available through the Small Business Administration,” Reay said, “but when you get into the larger hotels, there are fewer buyers because that requires more of a down payment, and a lot of lenders are shying away from doing hotel financing.”

As was the case was during the first half of last year, there have been few blockbuster sales so far this year, with the largest topping out at $53 million. A year ago, the largest single sales were the Inn at Rancho Santa Fe — at $42.7 million — and the Moxy in the Gaslamp, which sold for $46 million.

The good news for San Diego, Reay says, is that while the pace of hotel sales has clearly slowed here, it remains a strong market that is not experiencing the same financial distress as San Francisco and downtown Los Angeles. As an example, he pointed to a recent decision by the investment firm that owns the Hilton San Francisco Union Square and Parc 55 hotels to walk away from its debt and stop making payments on a $725 million loan.

The Atlas report notes that in the first half of 2023, there have been eight California hotels foreclosed on, the largest being the 394-room Fairmont Century Plaza in Los Angeles.

“So we’re seeing a little bit that’s similar to what we’ve been seeing with office buildings in our downtowns,” Reay said of the growing vacancy rates amid continued remote work. “A lot of larger hotels catering to meetings in San Francisco and downtown L.A. are really hurting but we’re not seeing that in San Diego. That’s due in large part to San Diego’s diverse economic base and San Diego picking up a lot of the convention business that has left San Francisco.”