Shutdowns Put California Hotels on Track for Worst Year for Property Sales

Shutdowns Put California Hotels on Track for Worst Year for Property Sales

Deals on Hold as Buyers, Sellers Figure Out New Normal for Valuations

Coronavirus-related shutdowns have brought hotel property sales in California to a screeching halt this year, putting deal volumes on pace for their lowest year on record.

Listings and purchases have dropped as buyers and sellers look for signs of any return to basic revenue streams and other metrics that guide the valuation of properties.

“The transaction volume is shaping up to be the worst year since we’ve been tracking it for the past 20 years,” said Alan Reay, president of California-focused hotel brokerage Atlas Hospitality Group in Irvine.

California for decades has been among the nation’s top states for hotel property sales and development, thanks to multiple demand generators including population growth, rising international tourism, convention business and related corporate travel demand from bustling industries such as technology and media production. Atlas reported that California set a record for new hotel rooms opened last year, 11,795 rooms in 92 hotels, and hotel property sales topped $6 billion for the fourth-highest dollar volume on record, rising 7.4% from 2018.

Reay told CoStar News that deal volume in the state for the first five months of 2020 was down 50% from the same time in 2019, with only 43 properties changing hands for a total of $663 million through May 26.

The drop was sharp for the period of March 1 through May 26, factoring in statewide hotel shutdowns spurred by stay-at-home orders, business shutdowns and a drastic curtailment in travel nationwide that started in mid-March. For that period, California saw just 13 hotels change hands, a drop of 76% from the 55 sold in the same time in 2019.

The usually robust California market has posted just $127.9 million in hotel deal dollar volume since March 1, down 86% from the $896 million for the same period a year ago, according to Atlas Hospitality numbers.

Most of the largest California hotels in major cities remain closed to all, except in some cases to house workers in healthcare and other industries deemed essential during the pandemic. The drastic and historically rare plunge in revenue for the Golden State’s hotel industry reflects a nationwide trend with hotel sale numbers even worse than those of the Great Recession in many cities. In all, it has potential sellers, buyers and lenders hitting pause.

“The perception of value is really hard to determine at this point, both for the buyers and the sellers,” said Jan Freitag, senior vice president with travel research firm STR, a CoStar Group company. “It’s very hard to get a deal done.”

Freitag said while there is plenty of parked money available to be invested nationwide, lenders and appraisers need some kind of solid and consistent base for gauging metrics including net operating income and trailing year’s revenue, before investors can move forward with deals. At least for now, there is uncertainty as to what constitutes a fair valuation on a hotel property.

To a greater extent than even in the Great Recession, Freitag said buyer and seller expectations are out of sync, with buyers expecting to get major bargains if they acquire in the current climate, and current owners holding off on marketing properties until better circumstances arrive.

Reay said multiple hotel owners nationwide have obtained deferments on loan payments from their lenders in the current environment, generally ranging from two to six months.

That would take the owners as far as the end of the third quarter. At that point, he said, either conditions will have improved, or some of owners may be forced to sell or give back properties to their lenders, assuming they have little chance of catching up with delinquent loan payments.

If that comes to pass, Reay said, it could trigger the bargain-finding that some prospective buyers are anticipating, along the lines of past recessions that impacted hospitality and tourism.

Nationwide, Reay noted that hotel property sales dollar volume dropped 62.3% from a year earlier for the first five months of 2020, to $2.86 billion, but the drop for the past three months was 84.5% to just $525 million. The number of U.S. transactions was down nearly 50% for the past five months and 75% for the pandemic-dominated past three months.

Because of the public’s current aversion to flying, both Reay and Freitag said hotels that capitalize on regional drive-in traffic in resort areas of California and other states could be the first to see a revenue rebound and ultimately more property sales activity as hotels reopen in coming weeks.

CoStar data shows the highest-priced hotel property transaction in California so far in 2020 involved the $117.5 million acquisition of the ground lease on a 353-room Hilton in San Jose on Jan. 13, by GEM Realty Capital of Chicago. Since March 1, the highest-priced California deal was the $27.5 million purchase of a 131-room Element by Westin property in Ontario on May 7, by SI & C Ontario LLC.

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