SFGATE contributor Randy Diamond recaps the latest in San Francisco hotel news for the column Get a Room

By Randy Diamond | Aug 30, 2024

This week in Get a Room, SFGATE’s roundup of news on hotels and accommodations in San Francisco, we check in on the Hilton and Parc 55. The city’s largest hotel, the Hilton San Francisco Union Square, is in flux after its investors defaulted on their loan last year. During a recent visit, the disarray was hard to miss.

Compared with other cities, the industry in San Francisco continues to lag in its recovery, but optimism isn’t hard to find — as suggested by a new hotel with a clear vision from its investors for the city. Elsewhere, a hotel in Fisherman’s Wharf was awarded top marks in an annual readers’ poll (with one visitor saying it has “the coolest atmosphere of any hotel I’ve been to”). The market’s volatility is on display as a former startup unicorn that disrupted the lodging industry now faces a rough road after a sharp financial tumble. A candidate to become San Francisco’s next mayor is tied to the local company as it revamps by partnering with a legacy hotel brand to weather the storm. 

Tourism and its economy are some of the quickest ways to boost San Francisco out of its rut, and as numbers roll for hotel stays during the first part of summer, the city is on the right track but is taking its time.

Sticking out like a sore thumb high-rise

The 46th-floor rooftop lounge at San Francisco’s largest hotel offers stunning views of downtown but is closed for renovations. Guests say the hotel rooms are outdated and cramped. And the hotel’s main dining room shut for good in the wake of the pandemic.

Such is the distressing state of the 1,921-room Hilton San Francisco Union Square, a reflection of SF’s troubled lodging industry. 

Currently, a court-appointed receiver runs both the Hilton and Parc 55, its companion hotel across the street adding an extra 1,000 rooms. A San Francisco Superior Court judge gave the receiver until the end of March 2025 to sell the hotels. Otherwise, they will wind up in the hands of a consortium of lenders who would be forced to foreclose and sell them themselves.

The former owner, Virginia’s Park Hotels & Resorts, walked away from its $725 million mortgage on the Hilton and the Parc 55 hotel in June 2023.

Not only is the fate of the two giant hotels in doubt, but so far this year, at least 15 other SF hotels defaulted on their mortgages, missed payments to lenders or are on a financial watch list, according to CoStar, a real estate services firm that tracks hotel financial and occupancy data.

However, many of the other troubled hotels are smaller establishments with several hundred rooms. With almost 3,000 rooms combined, if Hilton and Parc 55 were to close, it would reduce the city’s hotel rooms by around 10% in one big swoop.

As he nursed a cocktail in the Hilton Union Square’s lobby, Dallas tourist John Tane wished he were elsewhere. “The fixtures are outdated, and the bathroom is small,” he said of his suite during a stay in August. “There is barely room for the commode.”

Another disappointment was discovering that the 46th-floor rooftop lounge, the highest in San Francisco, was closed for renovations. “My wife and I would have had a drink up there tonight,” he said. Tane, who has stayed at dozens of Hiltons in different cities, said the San Francisco hotel did not meet his standards for the brand. 

The Cityscape Bar & Lounge has been closed since late spring, and while its website states it will reopen in the fall, the details are unclear. Neither Hilton representatives nor the receiver responded to requests for comment.

Also unusual for such a large hotel is that the Hilton does not have a dining room for lunch or dinner. 

The lone food option besides a breakfast-only dining room has been a grab-and-go food counter with several tables. The Hilton’s main restaurant, Urban Tavern, never reopened after shutting down in March 2020.  

A bartender offered a brochure with a list of nearby restaurants, including the Parc 55 hotel dining room. (However, the name of Hilton’s sister hotel was misspelled as “Park 55.”)

It is still unclear whether the San Francisco Hilton Union Square and Parc 55 will remain hotels in a market that has experienced a challenging recovery. Hotel analysts don’t see the San Francisco hotel market reaching robust pre-pandemic financial numbers and occupancy rates until at least 2029.

In the 12 months leading up to April this year, Hilton and Parc 55 hotels combined had a 52% occupancy rate and lost $7.9 million, according to financial firm KBRA Analytics. Contrast that with a 92% occupancy rate in the year before the pandemic and a $107.9 million profit.

In July, KBRA Analytics said that both hotels were worth $553.8 million, a 65% drop from a 2016 appraisal of $1.56 billion. 

While buyers might get the hotels for a deep discount, they must also pay for extensive renovations to remain competitive and meet Hilton standards. Hilton has a long-term contract to manage the lodging establishments. 

In an investor presentation last year, Park Hotels & Resorts said it would have needed to make $200 million in capital expenditures for the two hotels over the next five years. It’s a bleak picture for buyers who would need to spend more cash to renovate the hotels without profitability for quite a while.  

Given the forecast for the San Francisco hotel market to recover to pre-pandemic levels, “It might be difficult to sell the hotels,” said Maverick Force, senior director of KBRA Analytics.

One possibility is for the hotels to be converted to moderate-income or low-income housing, helping ease San Francisco’s affordable housing crisis. However, Alan Reay, president of Atlas Hospitality Group, said the financial feasibility of such a conversion could be challenging given the size of the two hotels. Reay, who sells California hotels, said both lodging establishments have ballrooms and meeting spaces that couldn’t easily convert to apartments.  

How bad is the San Francisco hotel market, really?

The latest statistics from the CoStar Group are not rosy. It said San Francisco hotels ranked dead last in recovery to pre-pandemic revenue levels in the nation. That’s out of 171 markets analyzed between January 2019 and July 2024. 

The CoStar Group data show that the average revenue hotel operators earned per San Francisco hotel room was $136.17 in July compared with $193.33 in July 2019 before the pandemic. 

As of July 2024, SF hotel occupancy was also the least recovered in the nation post-COVID-19. San Francisco hotels reached a 70.1% occupancy level in July 2024, the best all year, but according to the CoStar Group numbers, they were at 84.6% in July 2019. 

The average occupancy for the first seven months of 2024 was a lower 65.1% compared with more than 80% in the first seven months of 2019. 

In one category, average room rates, San Francisco wasn’t the worst in the nation but second worst regarding post-pandemic recovery, CoStar Group data shows.

Hotel rates are also continuing to drop. According to the CoStar numbers, the average room rate of $194.12 this July is down from $206.50 in July 2023 and $216.05 in July 2022. Before the pandemic, in July 2019, the average room rate was $228.48.

Emmy Hise, CoStar Group’s senior director of hospitality analytics, said various factors have impacted the SF market, including the “doom loop” cycle of downtown stores closing and empty office buildings, fewer tourists from Asian countries visiting, and concerns about crime that have led to some conventions canceling their events. 

Then there’s been the never-ending stream of news stories from around the world about San Francisco’s demise. “I think the negative press has altered the perception of San Francisco on both the leisure and [convention] group side,” Hise said. 

Denver-based Hise said she visited San Francisco two times this year. “I honestly thought it’s been fine and good and fun to be at,” she said.

But changing potential visitor perceptions isn’t easy, Hise said. CoStar predicts a gradual increase in hotel room revenue, room rates and occupancy starting next year but doesn’t see San Francisco hotels back to their pre-pandemic levels until toward the end of the decade.

In the meantime, CoStar has seven hotels on its watchlist for potential financial problems. This year’s list of hotels that have already defaulted or missed financial payments to lenders includes the Four Seasons Embarcadero, Hilton San Francisco Financial District, Hyatt Regency SoMa, Club Quarters and Kimpton Alton Hotel. 

Hyatt Regency SoMa on Third Street, formerly the Park Central Hotel, underwent a $70 million renovation before reopening in February 2022.

All the hotels with financial issues are still open, but closures could mean job losses in one of San Francisco’s largest industries behind tech. 

Ted Waechter, a spokesman for United Here Local 2, which represents hotel workers in the Bay Area, said 900 union employees work at the Hilton Union Square and Parc 55 hotels alone. He said many workers are already on frequent furloughs because hotels reduce staff as occupancy drops on certain days. 

Local 2 members at eight SF hotels, including SF Hilton Union Square and Parc 55, authorized a strike in early August over job security, wages and health benefits but remain on the job.

Optimism despite financial hitches

The former Hotel Vertigo, of Alfred Hitchcock fame, is slated to open in early September under the name Hotel Julian. The opening is planned even though hotel developer and operator Oxford Capital Group has seen financial struggles with the hotel and others it operates in SF. 

The 107-room hotel on Sutter Street in Nob Hill is set to feature renovated rooms and a two-story indoor-outdoor wine bar called Carlotta’s, a reference to the off-screen character in “Vertigo.”

A new hotel opening in the distressed San Francisco hotel market is a sign of optimism. 

However, in June, the San Francisco Business Times reported that Oxford Capital Group returned ownership of Hotel Julian and three hotels South of Market on Seventh Street — SoMa House, Hotel Garrett and Hotel Fiona  — to lender Acore Capital. 

Oxford Capital Group Chief Operating Officer Sarang Peruri told SFGATE that his company still has an ownership interest in the hotels. “We did not give the keys back,” Peruri said. “We are still in the deals.”

He called the deal with Acore a “financial restructuring of debt” that took several months to consummate but would not provide details. Acore Capital officials did not return an email requesting comment. 

In addition to Hotel Julian, Peruri said Oxford plans to open a sports-themed restaurant and bar at SoMa House in the fall. 

“We are big believers in San Francisco in the long run,” he said.

While a full recovery of hotel revenue to pre-pandemic levels will likely take five years or more, Peruri said that Hotel Julian and other hotels operated by his company will ultimately thrive. He said he was encouraged by recent city actions to combat crime and clear homeless encampments. 

“Word is getting out that San Francisco is safer, cleaner,” he said, suggesting that it will speed up the recovery time.

Nevertheless, the Oxford financial restructuring shows the volatility of the San Francisco hotel market. The restructuring came less than a year after San Francisco Mayor London Breed joined Oxford officials on Seventh Street, the site of the renovated SoMa House, Hotel Garrett and Hotel Fiona.
 
The mayor stood on Seventh Street in November 2023, a corridor known for open drug dealing and encampments, to hail a new era for the neighborhood because of the renovated hotels.

A bayside hotel with ‘the coolest atmosphere’

From an outside perspective, Hotel Zephyr on Beach Street in Fisherman’s Wharf looks like any motel in a touristy area: a generic four-story building with balconies. However, the small porthole design on the room windows helps differentiate the Zephyr from chain hotel competitors, hinting that something else is at play. 

The hotel was rated No. 1 among San Francisco hotels in Travel + Leisure’s World’s Best Awards, a reader survey of the best in travel published in July.

Hotel Zephyr beat the usual suspects: Four Seasons Hotel San Francisco at Embarcadero at No. 2, Beacon Grand (formerly the Sir Francis Drake) at No. 3, the St. Regis San Francisco at No. 4, and Four Seasons San Francisco on Market Street at No. 5.

I went inside the hotel to see what the fuss was about. The lobby had a nautical theme, with one wall designed to resemble freighter ship containers. I then stepped into the courtyard, where I immediately found fun. 

Smiling guests sat in the courtyard at four fire pits cooking s’mores provided by the hotel while others played games like shuffleboard or a giant-sized Connect Four set. Nearby was a periscope for views of San Francisco Bay. A view of the 150-foot-tall SkyStar Wheel from the courtyard adds to the festive atmosphere.

One reader told T+L that Hotel Zephyr has “the coolest atmosphere of any hotel I’ve been to.” 

Unlike the formal dining rooms of the runner-up hotels in the awards competition, Hotel Zephyr is a little more informal. It serves breakfast from a retro-style trailer called The Camper. Guests can take their food back to their rooms or eat by seats around the fire pits. 

Lunch and dinner are only slightly fancier. A coffee shop off the courtyard serves typical tourist fare: hamburgers, chicken wings and beer.

Business is booming at this nothing-fancy hotel. General manager Joyce Yun said August occupancy has been running at 97.8%. The forecast for the coming months is 89% occupancy.

Rates aren’t necessarily cheap; on some days, they start at just under $200 a night, and other times, they can push $250 or more. But that’s still half the price of other luxury hotel winners on the T+L list. 

Hotel Zephyr was previously the Radisson Hotel but changed its name after a $29 million renovation in 2015. Two years earlier, it had been purchased by the Pebblebrook Hotel Trust, which also owns 1 Hotel, Harbor Court and Argonaut Hotel. Yun said she was “surprised and happy” that Hotel Zephyr topped the T+L list, adding that it’s too early to tell what effect the rating will have on bookings.

Troubled SF lodging company charts a comeback

Things were looking bleak for San Francisco-based Sonder Holdings after the company laid off a chunk of its employees earlier this year.

An alternative lodging company founded in 2014, Sonder operates more than 9,000 short-time apartment rentals and hotel rooms in the country. It’s publicly traded, and the company owns the buildings where it leases units. 

Thayer Ventures, where San Francisco mayoral candidate Mark Farrell is a managing director, was an early investor. The San Francisco Chronicle reported in August that Farell once touted Sonder as the firm’s “most successful” investment. 

As occupancy lagged at some of its properties, the company’s value fell from $2.3 billion to $29 million in 30 months. Sonder also saw its stock share price crash in March after announcing its 2022 and 2023 financial prices couldn’t be relied on for accuracy. 

The Nasdaq Stock Market threatened to delist the company for late financial filings, giving it until Aug. 30 to file past earnings statements, including those from the second quarter of 2024.

On Aug. 19, the company made a mayday pivot for its future. Sonder announced it had received approximately $146 million from backers, and it made an agreement with Marriott International to market its rooms through the hotel chain.

Sonder and Marriott announced a new hotel brand, Sonder by Marriott Bonvoy, which will give Sonder one of the most well-known reservation channels in the world to sell its rooms. Sonder officials did not respond to an email from SFGATE. 

As for the delayed financial returns, Sonder said in a statement on Aug. 20 that it “can provide no assurances” as to when it will make the financial filings but will continue to work diligently to complete them “as soon as practicable.” 

The Chronicle and SFGATE are both owned by Hearst but have separate newsrooms.

Have a comment or a tip on the hotel beat? Randy Diamond can be reached at randolphdiamond@gmail.com.

Aug 30, 2024

Randy Diamond