Rooms in California Are Going Fast
The sale of California hotels jumped 29% last year as the travel industry began to recover and opportunistic real estate investors decided to move in.
Two hundred sixty-seven hotels traded hands in 2003, up from 207 in 2002, according to a study by Atlas Hospitality Group, a Costa Mesa hotel broker and consulting firm. Of those 267 sales, 193 were in Southern California.
Atlas President Alan Reay attributed the buying boom to a combination of factors, including low interest rates and a perception by lenders that hotels are undervalued compared to other categories of commercial real estate.
Several investment funds created after the Sept. 11, 2001, terrorist attacks in anticipation of buying distressed hotels at a discount made their moves in 2003, he said.
“Larger transactions tended to be done by the opportunistic funds,” Reay said. “Smaller deals tended to be owner operators or small hotel companies with three or four hotels.”
The buying binge did not translate into a corresponding increase in prices. The median price per room rose just 2.8% in Southern California to $52,778; in Northern California, the per-room price plunged 28%, to $43,919, according to Atlas.
San Diego County was the top performer in Southern California. Its median price per room rose 16% to $62,500 and came on top of a strong performance in 2002. The county’s convention and tourism business has been growing for more than a decade and is expected to get another jolt this year from the Padres’ new baseball stadium in downtown San Diego.
“San Diego is the barn burner,” said attorney Jim Butler, chairman of the global hospitality group at Jeffer, Mangels, Butler & Marmaro in Los Angeles.
The largest hotel sale in the state last year at $553,000 per room was the $383-million purchase of the historic Hotel del Coronado in San Diego County by CNL Hospitality Properties Inc. of Orlando and La Quinta-based KSL Recreation Corp. The 115-year-old beachfront hotel has 688 rooms and has received approval for an expansion that could include 205 rooms and a conference center.
Other large transactions in 2003 were Merv Griffin’s sale of the Beverly Hilton in Beverly Hills for $135 million, or $232,000 a room. The Warner Center Marriott in Woodland Hills sold for $85.3 million, or $184,000 a room; the Sheraton Universal Hotel in Universal City went for $49 million, or $112,000 a room; and the Pan Pacific Hotel in San Francisco sold for $47 million, or $143,000 a room.
Los Angeles County had 69 hotels change hands last year, a 47% increase. The median price per room, however, was flat at $48,600. In Orange County there were 29 hotels sold, one fewer than the year before, and the median price per room slipped 6% to $53,400.
San Francisco County saw its number of transactions rise from nine to 17, but the median price per room fell 45% to $86,000 as some owners were forced to give up their distressed properties, Reay said.
Reay predicts there will be even more Northern California sales in 2004 as owners run out of time and money to keep their properties out of default.
A rise in interest rates could push some hotel owners with variable-rate mortgages into forced sales as their required monthly payments increase.
The fact that few new hotels have been built in the last three years suggests that the state’s hospitality industry will stabilize if the economy continues to improve, Butler said, and grow stronger in years to come.
An uncontrollable variable for owners is the nation’s security status. “The hotel market is still very fragile,” Butler said, “and hundreds of room-nights in occupancy are lost every time there is a terror alert.”
