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Improving metrics fuel California deal surge
August 30 2013

Omni Hotels’ $365.8-million acquisition of the 607-room La Costa Resort and Spa in Carlsbad represented the largest deal in California during the first half of 2013, according to Atlas Hospitality Group.

Highlights
  • California experienced a 12.6% increase in the number of first-half transactions in 2013.
  • Southern California’s deal volume increased 149.3%.
  • Hoteliers said increased demand has driven sales, but some challenges remain for California properties.

REPORT FROM CALIFORNIA—The state with the nation’s most densely populated hotel roster is experiencing two distinctly different transaction climates.

In its “2013 Mid-Year California Hotel Sales Survey,” Irvine-based Atlas Hospitality Group said the southern California market dramatically outperformed northern California in sales price and price per room, while the northern half of the state had more completed deals during the first six months of the year.

Overall, California—which has 5,501 hotels comprising 500,807 rooms, according to Hotel News Now parent company STR—experienced a 12.6% increase in the number of first-half transactions to 179. The deals represent a 24% increase in total dollar volume over the same period a year ago.

“Undoubtedly there’s been a resurgence in demand, particularly in the major markets in California,” said Lee Pillsbury, co-chairman and CEO of Thayer Lodging Group, which in July announced it acquired the 338-room Ritz-Carlton San Francisco and is marketing for sale the J.W. Marriott San Francisco that it bought in 2011. “The economy is recovering; the state has surprised maybe even itself with how strong the recovery has been. … We have a lot of confidence in the long-term viability for the market.”

Pillsbury said the rejuvenation of downtown areas in San Diego and Los Angeles have done a lot for hotel values, and that Thayer is on the hunt for other deals in the state. “We’re always looking,” he said.

San Francisco’s downtown has been positively impacted by technology-oriented companies moving there from Silicon Valley so they can be located closer to where their work forces live, according to Pillsbury. He said the L.A. Live project in Los Angeles has overhauled that city’s downtown hotel market.

The southern California hotel market, which the Atlas Hospitality report said experienced a 149.3% increase in total volume during the first half of the year, has had an encouraging year but still has a long way to go, according to Jim Roos, president of Costa Mesa-based Ayres Hotels. The company has 20 hotels open within an hour drive of its headquarters, and another opening in Fountain Valley in November, in addition to hotels in Orange and Paso Robles opening in 2014. It sold a hotel in Orange in 2012.

Year to date through July, California’s statewide occupancy is 71.2% (up 2.7% from the same time last year), according to STR. Its average daily rate is $128.73 (+5.2%), and revenue per available room is $91.65 (+8%).

Available hotel stock
Roos said buyers’ interest in hotels comes in large part because of a lack of better investment options.

“There’s certainly speculation that there will be a lot of upside on the real estate value,” he said. “We would acquire, but we’re very particular about the end product and we haven’t seen prices we like.”

Roos said there’s plenty of international influence on purchase prices, even in tertiary markets. Chinese investors in particular are looking for acquisition opportunities, especially distressed hotels.

Alan Reay, president of Atlas Hospitality, said international investors are just one of the groups competing for transactions.

“There’s huge demand for trophy assets from (real estate investment trusts), private equity and overseas investors, particularly from Asia/Pacific,” he said.

That demand, in turn, has fueled the high dollar volume.

“Northern California was just an anomaly that we had fewer larger sales transactions,” he said. “We’ll see dollar volume come up (as 2013 progresses). In southern California, there were some very, very large hotels (sold) there.”

The survey said there were three hotel sales for more than $100 million during the first half of the year. The most expensive California hotel sale reported during the time period was the $365.8 million paid by Omni Hotels for the 607-room La Costa Resort and Spa in Carlsbad. The acquisition was part of a five-hotel acquisition by Omni from KSL resorts. The deal helped elevate San Diego County’s sales dollar volume by 1,895.1% to $744.2 million, according to the report.

Record year in store?
Other highlights of the mid-year report include:

  • The statewide median price per room was up 28.5%;
  • the number of transactions above $5 million in the state increased 28.2%; and
  • the number of individual transactions was up 12.6%.

Reay said he expects 350-plus hotel sales in California this year. Dollar volume could surpass $4 billion for the first time.

“We will see a record amount of sales … and record volume (in 2013),” he said, adding that will be driven in part by favorable financing conditions.

Hoteliers in the market said there are challenges to owning hotels in the state.

Pillsbury said labor costs, which are factored into capitalization rates via cash flow during the transaction process, represent a big hurdle for many hotel operators. Organized labor is a fixture in most major markets throughout the state.

“It’s all against the backdrop of pretty high state taxes and operating costs,” he said. “Labor activity is a major concern in many high cost labor environments.”

All of this leaves California hotel owners with a clear path to success.

“The focus from an ownership standpoint in California is always on rate rather than occupancy,” Pillsbury said. “It is recognizing that the net average room rate has to be managed very closely.”

Meanwhile, Ayres’ Roos said he’s not sure why anyone would want to enter the hotel business at this juncture, but buying into the industry in California is much easier than building into it.

“Frankly, it’s tough,” he said. “We’re running decent revenues but costs have gone up so much and regulatory issues are of such constraint that it makes it tough to get into developing. If you can buy an existing hotel cheap enough, do it. But we can’t find them.”

“Barriers to entry: That’s the buzz sentence,” Reay said.

Ayres likes to always have at least one hotel in development. It parlays its general contractor side of the company into construction efficiencies, Roos said.

“There’s more international leisure and business travel coming here,” he said. “There’s a lot of supply, and there’s 14 more hotels coming in Anaheim alone. It’s a tough market, but it’s a good market. One thing we know is that the weather hasn’t changed in southern California, and that’s a big attraction for hotel guests.”

 

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