Hotels in Silicon Valley are reaping the benefits of sharing the same zip codes as several widely successful international technology companies.
REPORT FROM THE U.S.—Known for the success of the technology companies that call the area south of San Francisco home, Silicon Valley, California, is one of the U.S. hotel markets experiencing above-average performance and attracting the attention of owners and developers across the country.
Silicon Valley is actually a collection of a number of communities in and around Santa Clara County. Early in its development, the area was home to a handful of companies that “boomed and busted,” said Alan Reay, president of Atlas Hospitality Group. Now there are well-established companies with incredible office campuses that draw in business travelers—as well as a growing number of leisure travelers—from around the world.
Northern California didn’t take the same hit as Southern California did during the downturn, Reay said. That—along with less overbuilding, scarcity of land and barriers to entry—has contributed to a “tremendous amount of interest” and appreciation in the marketplace, he said. The Santa Clara/Silicon Valley area is probably in the top five, even top three, desirable markets in California, he added.
Looking long-term, “the Silicon Valley area is going to be a good investment,” Reay said.
For the purposes of his company’s surveys, Reay said he classifies Silicon Valley as Santa Clara Country. The sales survey showed an 8% decline in transactions in 2016, he said, dropping from 13 hotels to 12. The median price per room dropped by 2%, but Reay advised not to look too deeply into that because there wasn’t a large volume of sales.
“It’s a stabilized market,” he said. “Not many are wanting to sell.”
Hersha Hospitality Trust acquired the Courtyard by Marriott Sunnyvale Mountain View in 2016 for $75 million. The company also owns the TownePlace Suites by Marriott Sunnyvale Mountain View and the Sanctuary Beach Resort in nearby Monterey Bay, while Hersha Hospitality Management operates three additional properties in the area. Hersha President and COO Neil Shah said his company focuses on investment clusters, particularly in areas of high innovation. Over the past five years, the company has invested approximately $350 million in California overall.
“Hotels are very expensive in Silicon Valley because it is a market that’s very attractive to U.S. investors and international investors, long-term and short-term investors because there’s such solid growth,” he said. “It’s hard to find great opportunities. That’s why it’s taking us longer in Silicon Valley to achieve putting together a larger cluster.”
Chatham Lodging Trust acquired four Silicon Valley Residence Inns in 2014. EVP and COO Dennis Craven said the company was familiar with owning and operating hotels in the market and is a strong believer in Silicon Valley. The real estate investment trust could consider further hotel purchases in the market, he said, as strong demand offsets new supply to make it a great long-term market.
“Silicon Valley is the hub for job growth in the country, and some of the largest companies in the world are investing billions of dollars in the valley, ensuring the long-term viability of the valley,” he said by email.
Under the right conditions, Craven said Chatham would consider selling off one of its Silicon Valley assets to deliver higher returns to shareholders.
“We would opportunistically sell one of the assets and invest in a different asset or expand an existing asset within the market or even another market that would deliver better returns,” he said. “Additionally, we might look to divest an asset if capital expenditures were burdensome.”
Tough for development
Santa Clara County opened two hotels in 2016, a drop from six new openings in 2015, Reay said. There were six hotels with 893 rooms under construction by the end of 2016, he said, which is close to 2015’s numbers.
Ensemble Real Estate Investment has started construction on the $145-million, 250-room Hotel Nia Autograph Collection near Facebook’s campus in Menlo Park and is scheduled to open the property in early 2018, said Brian Ehrlich, chief investment officer at Ensemble.
The development went through a “bulletproof” entitlement process, Ehrlich said. Menlo Park residents approved of the project in a ballot referendum and the city government was supportive instead of throwing up obstacles, he said. Still, no matter where developers are building, California has a drawn-out process.
“California is certainly among the top in the nation as it relates to the process being a barrier to entry in many markets,” he said. “It is very long and at times arduous. It is full of a lot of checks and balances, both at the municipal level and state level.”
Menlo Park previously had been known to resist growth, but the city and residents realized they were surrounded by cities taking the opposite approach, which meant they felt the effects of that growth without getting any of the tax revenue.
Ensemble is pushing forward on construction because of the strength in the market, Ehrlich said. There’s a large amount of supply planned up and down the tech corridor, he said, but the Hotel Nia is only one of two full-service hotels planned for the market. Everything else in the market is “premium brand select-service” and extended stay, he said.
“I think we’ll fit a needed niche,” he said, adding the hotel should compete well against older full-service hotels already in the market.
Despite a lengthy entitlement process and other barriers to entry, owners and developers have had success in Silicon Valley by taking different approaches.
Chatham’s four Residence Inns sit on large plots of valuable land, Craven said, opening up a number of options. The company could add new rooms by tearing down smaller buildings and replacing them with a new tower, much like it did with the property in Mountain View, he said.
“The excess land also provides us with an option to partner with a developer of a different asset class, such as multi-family, in a project where we could split the existing acreage, sell off the land and redevelop the remaining parcel with a larger hotel,” he said.
Obviously the biggest demand generators are the nearby technology companies, Shah said. Monday through Friday, Hersha’s hotels are occupied 90% to 95% by corporate transient guests, and much of it is through locally negotiated rates with the larger companies in the area. The hotels do leave some room for leisure transient guests during the week, he said.
While some corporate guests might extend their stay over the weekends, he said, the guest mix changes to about 80% leisure over the weekend. Most of the guests, both corporate and leisure, are transient, Shah said, as Hersha has focused on acquiring smaller hotels with typically fewer than 150 rooms.
“At this size of hotel and such great locations, we don’t need to really focus on any kind of group business to fill rooms,” he said.
Guests want to spend time together and network, said Florian Riedel, GM of the Four Seasons Hotel Silicon Valley in Palo Alto. They want to meet in public spaces so they can connect, he said, but they also want some privacy to share their ideas. When the hotel renovated its lobby, it took this particular need into consideration and created two more flexible meeting spaces for guests, he said. The lobby has an open floor plan, but at any given time, there are sections that can be closed off.
“They can ask to get together with a few people, and we can change that and create privacy within a few moments’ notice,” he said.
There’s great demand midweek for any hotel in the area, Riedel said, and while it’s mostly a business-related market, his hotel is pushing weekends a little more for leisure guests. The property’s new restaurant lounge provides a leisure experience for Silicon Valley and an escape from city life in San Francisco, he said.
While the area is known for its tech industry and dynamic environment, Riedel said, people are learning they can have a fun and exciting weekend there as well. Many residents from San Francisco like to travel to destinations such as Napa Valley and Lake Tahoe, he said, but those are three-hour drives while Silicon Valley is only about half an hour away.
“They can spend a bit less and have just as good a weekend as the other places,” he said. “It’s an opportunity for us and for Silicon Valley in general.”
Because Silicon Valley is not officially a hotel market tracked by STR, parent company of Hotel News Now, HNN reviewed performance data for cities typically associated with Silicon Valley: Campbell, Cupertino, Los Altos, Los Altos Hills, Los Gatos, Milpitas, Monte Sereno, Morgan Hill, Mountain View, Palo Alto, San Jose, Santa Clara, Saratoga and Sunnyvale.
In 2016, overall occupancy for these locations declined 0.3% year over year to 77.9%, but average daily rate grew 6.1% to $194.94, driving revenue per available room up 5.8% to $151.88. Although Silicon Valley saw mostly positive growth in 2016, the ADR and RevPAR increases pale in comparison to 2015’s 14.7% ADR growth and 15.6% RevPAR growth—and those metrics showed double-digit growth back to at least 2012, according to STR data.
February 2017 data shows occupancy grew 1.9% year over year to 77.8% while ADR dropped 7% to $202.79 and RevPAR declined 5.2% to $157.77.
Chatham’s four properties in the area are outperforming their initial underwriting, Craven said. Demand has been strong, offsetting any supply growth and allowing the company to raise occupancy levels and increase average daily rates.
“We are expecting RevPAR to continue to grow low- to mid-single digits in 2017,” he said.
While markets in much of the country have seen decelerating growth, Silicon Valley has been one of the big exceptions, Shah said. Last year was a solid year for Hersha’s Silicon Valley properties. The Courtyard in Sunnyvale grew RevPAR 3% to 5% in Q4 2016, he said.
The first quarter of 2017 has a tough comparison because Santa Clara hosted the 2016 Super Bowl, he said, but he expects Silicon Valley will be one of the higher growth markets for the remainder of the year.
Because of the proximity to San Francisco, Shah said the closing of the Moscone Center for expansion might have a spillover effect on compression in Silicon Valley. However, the market is still growing at significant levels and has its own dedicated demand drivers.
“In an environment where nationally growth is pretty tepid, we’re pretty confident Silicon Valley can outperform,” he said.