By Jack Stubbs
California hotel sales have experienced significant stagnation – and a historical decline – in the first half of the year, according to a recent report by Newport Beach-based Atlas Hospitality Group, a commercial real estate company specializing in the sale of California hotels.
The ‘2023 Mid-Year California Hotel Sales Survey’ provided a comparison of hotel sales activity in Northern and Southern California, as well as a county-by-county comparison of individual sales, dollar volume, median price-per-room and the largest sale in each county.
California individual hotel sales were down 53 percent from the same period in 2022, according to the report, marking a downward trajectory not seen for over a decade.
“We’ve been tracking California hotel sales for over 20 years, and this is the steepest decline we’ve ever seen. The only year that ever came close to this was 2009, right in the middle of the recession [when individual sales were down 51 percent],” said President of Atlas Hospitality Group Alan Reay.
In San Diego County, individual sales decreased by 48 percent, with total dollar volume dropping 45 percent. At the same time, the median price-per-room rose 52 percent. The most expensive sale was the 133-room Pala Mesa Resort in Fallbrook, which traded hands for $53 million, or $398,496 per room.
Further north in Los Angeles County, individual sales declined by 53 percent through the first six months of 2023, while dollar volume increased by 25 percent. The median price-per-room declined by 13 percent, and the most expensive sale was the $760 million paid by the lender at the foreclosure sale for the 394-room Fairmont Century Plaza Hotel. The hotel property is now owned by the Reuben Brothers, according to previous reporting from The Registry.
The most expensive sale in Orange County – where individual hotel sales were down 68 percent and the median price-per-room increased 54 percent – was MHG Capital’s acquisition of the 251-room Doubletree Anaheim Resort for $62 million, or about $247,011 per room.
In Riverside County, individual sales dropped 45 percent, total dollar volume was down more than 80 percent and the median price-per-room rose 66 percent. In San Bernardino County – where individual sales declined the most of any county analyzed in the report, dropping 95 percent, with total dollar volume down 97 percent.
Shifting to Northern California, San Francisco County saw individual sales decrease by 20 percent and dollar volume decrease by 69 percent. The median price-per-room was down two percent. The most expensive sale in the Golden City was the 135-room Hotel Huntington San Francisco, another REO sale for which the lender paid $29.26 million The property is now owned by Highgate and Flynn, according to The Registry’s previous reporting.
In Sacramento County, individual sales were down 86 percent and dollar volume was down 84 percent, with the median price per room increasing 9.5 percent. The only hotel sold was the REO sale of the 65-room Holiday Inn Express & Suites in Elk Grove for $10.54 million ($162,153 per room).
In terms of broader factors impacting hotel sales trends, there is an incongruence in expectations between the buyer and the seller, explained Reay. The prices that sellers are looking for are not commensurate with the cost that buyers have to pay for loans.
“One word that would sum up the decline in sales is ‘disconnect,’ which is a disconnect between buyer and seller expectations. That’s pretty much exclusively driven by the rapid increase in interest rates,” he said.
Interest rates have risen to such an extent since early 2022 that sellers’ expectations are not aligned with buyers’ ability to bridge the gap, explained Reay.
“In the first half of 2022, you were able to still borrow on hotels as low as four percent interest; some clients were sub-four percent. At the first half of 2023, a lot of banks have pulled out from even making loans on hotels, and the banks that still remain are in the minimum 7.5 to 8.5 percent range,” he said.
“So interest rates have doubled, yet there are sellers that still want to obtain the same prices that other hotels sold for 6 to 12 months ago, and that’s just impossible. As interest rates rise, cap rates have to follow, which is similar to what we saw in 2009, where sellers wanted to obtain the same prices from 2008, buyers were nowhere near those prices.”
Almost entirely across the board in California, changes in interest rates in the middle of 2023 have shifted the hotel sales market.
“In almost every county with the exception of two – Los Angeles County and San Francisco – there’s a situation where the price adjustment has not taken into account the change in interest rates,” said Reay. “A number of buyers had to complete 1031 Exchanges, where they had sold hotels and had to replace their capital gains. So even with the increases in interest rates, those buyers still went forward, which we saw slow down in the second quarter.”
Occurring concurrently with the steep decline in hotel sales is a precipitous stagnation of development activity. According to Atlas Hospitality Group’s mid-year hotel development survey, over the past two years, California has seen a significant decrease of more than 60 percent in the opening of new hotels and rooms in the first half of the year, with expectations for further market strain in the next few quarters.
Due to a variety of factors, there is an air of uncertainty ahead characterizing the hotel market from both a sales and development perspective, according to Reay.
“The cost of construction is doing nothing but rising, from labor, materials and everything else. You don’t want to be building a hotel for, let’s say, $300,000 per room, if upon completion it’s valued at $200,000 per room. Trying to get a hotel loan is difficult enough; trying to get a hotel construction loan is virtually impossible, because the lenders are so uncertain as to what the values are and where these values are going.”
