1998 California Hotel Sales Are Brisk
Buyers ranging from mom-and-pop operators to huge public companies bet on California hotels as a good investment in 1998, spending $1.3 billion for 203 properties in Southern California and $1.4 billion for 110 properties in Northern California.
The figures reflect a four-year trend of steadily climbing hotel sales, by dollar volume, in California. They also mark the first time in four years that the total value of Northern California sales exceeded that of Southern California, according to a report from Costa Mesa-based Atlas Hospitality Group, a brokerage and consulting firm.
The 1998 results indicate that the Southern California hotel market has recovered fully from the lingering impact of the recession, according to Atlas President Alan Reay, who noted that the region’s improving economy has boosted business travel, a mainstay of many of the extended-stay and limited-service hotels that make up much of the industry.
But the report also shows Southern California hotel values lagging those of Northern California, which suffered less and recovered faster from the recession. The median price per room for hotels purchased in Northern California was $51,421, compared with $31,057 in Southern California. Northern California also surpassed the Southland in average sales price, $13.5 million versus $6.6 million.
Reay said the typical sale in Southern California was a 60-room hotel selling for about $30,000 per room--or a total of $1.8 million. Buyers typically are individuals or families acquiring a property in the $1.8-million range for a 10% down payment through a Small Business Administration loan, he said.
“The sales that get the most press coverage are the big five-star hotels, because the prices are much higher, but the vast majority of the transactions are much smaller,” Reay said.
Reay and other industry analysts said most of the action occurred in the extended-stay segment and limited-service hotels, generally defined as smaller hotels that do not include a restaurant. Among the limited-service brand names are Best Western, Holiday Inn Express, Howard Johnson, Comfort Inn, Quality Inn and Ramada Limited.
The extended-stay and limited-service segments also accounted for much of the new hotel construction, which is booming in Northern California and San Diego County, said Karen Johnson, managing director of the Western region hospitality consulting and appraisal practice for Landauer Real Estate Counselors in Los Angeles. Orange County is also busy, she said, but construction is slower in Los Angeles County, where values generally remain too low to justify new building.
“You can track the pattern of economic recovery by looking at the pattern of [hotel] development,” Johnson said.
The higher sales volume reflects a regional and national hotel market that “has been improving dramatically every year for the past three or four years,” according to Neale Redington, who heads the Deloitte & Touche Western region hospitality group in Los Angeles.
Redington said hotel industry profits grew to approximately $20 billion in 1998 from $15 billion in 1997. In Los Angeles, he said, hotel operators have been raising room rates by about 10% a year for the last three years, increasing profits even more than the rate hikes might seem to indicate.
“A 10% increase in the room rate could mean an increase of up to 50% in profitability for a hotel operator because, once an operator has covered certain fixed costs, most of the remainder of the increase flows to the bottom line,” Redington explained.
According to Reay, some of the most striking findings in the annual survey are the contrasts between Southern and Northern California.
The number of sales in Southern California remained the same in 1998 as in 1997 at 203, while the number of sales in Northern California jumped to 110 from 79. One reason, Reay said, is that many Northern California hotel owners are selling because they are worried that the hotel construction boom may result in overbuilding.
“The one cloud on the horizon is the tremendous amount of new hotel development that we are now tracking. The rise in hotel prices has made new development once again economically viable, and we will see if the market is able to absorb all of the new product expected to come on line over the next 12 to 18 months,” Reay said in his report.
By contrast, development in Los Angeles County has lagged because the southern part of the state was saddled with dozens of foreclosed properties as recently as 1995 and ’96. Some 64 foreclosed properties were still on the market in Southern California in 1995 and 38 were sold in ‘96, while only 11 foreclosed properties were sold in Northern California during those years.
Development was beginning to pick up in Los Angeles County last year, but a number of hotel chains scuttled previously announced land purchase deals and scaled back development plans. In a Nov. 17 report in The Times, the chains cited an anticipated slowing of the national economy, a plunge in the value of hotel stocks and a shortage of financing caused by problems in the commercial mortgage-backed securities market.
According to Redington, commercial mortgage-backed securities lenders are still avoiding the hotel market, so values this year are likely to stabilize after last year’s climb. He said the financing difficulties have nothing to do with the underlying hotel industry, in which “the fundamentals are very sound” for the U.S.
Hotels in L.A. County enjoyed an average occupancy rate of 74.4% last year, largely unchanged from 74.1% in 1997, according to PKF Consulting, which tracks the region’s hospitality industry. At the same time, hotel owners boosted daily room prices by an average of $8.56 from $99.34 in 1997.
Reay said 60% occupancy is generally considered the break-even point for hotel operators, who prefer to raise rates when market demand permits, even if it means lower occupancy levels.
“The average hotel operator, rather than being 90% occupied with an average daily rate of say, $60, would prefer to be at 80% occupancy and get $75 per room,” Reay said. He said lower occupancy and higher rates mean fewer rooms to clean, lower expenses, less wear and tear and more revenue going to the bottom line.
