Although slower, California hotel sales set new record for median price per room

While hotel sales in California have cooled from their highs of last year, transactions during the first half of 2022 set a new record for median price per room and approached other records as well.

The Atlas Hospitality Group’s 2022 Mid-Year California Hotel Sales Survey reports that the state recorded 263 individual sales in the first half of the year, down 9.9% from compared to the first half of 2021. Total dollar volume reached $3.49 billion, or 33.59% year-on-year. one year decrease. However, the state hit a new all-time high for the median price per key at $143,443, a 12.7% year-over-year increase.

Los Angeles County led with the most hotel deals with 36. The deal with the highest price per room was the 295-room Fashion Island Hotel Newport Beach in Orange County, which will become a Pendry Hotel, in a $145 million lease sale. at around $491,525 per room.

“Sales have cooled somewhat from the record pace set in the first half [of last year]but it is still the second-highest number of individual sales and the third-highest total dollar volume in that six-month period,” said Atlas President Alan Reay.

Hotel deals are expected to continue to cool significantly in the second half of this year due to rising interest rates, economic uncertainty and fears of recession, he said. The hotel areas that have suffered the most during the pandemic, namely urban areas, are already showing signs of slowing down.

In 2021 and even in the first half of this year, buyers have been price aggressive, Reay said. Without current numbers, they relied on 2019 net operating profits and still paid relatively low cap rates.

The time it took for the market to recover, combined with rising interest rates and lenders not only becoming more cautious but, in some cases, withdrawing hotel space will mean fewer transactions involving full-service properties in urban areas, Reay said. There should still be good buyer demand for limited and select service hotels as well as extended stay properties.

Some of the biggest buyers are also among the biggest sellers, Reay said. Blackstone has made several acquisitions, including hotel franchise company Extended Stay America in a joint deal with Starwood Capital, but it has also been a big seller of Motel 6 properties.

Many publicly traded real estate investment trusts have also been active, he said. Pebblebrook Hotel Trust has sold a number of its hotels and reallocated capital to acquisitions. Park Hotels & Resorts announced on its recent earnings call that it plans to sell an additional $400 million in assets.

California also has plenty of Project Homekey funding, which gives sellers the opportunity to take advantage of 1031 exchanges, he said. The Homekey Project is a state-sponsored program that provides funds to local and county governments to purchase former hotels and motels to convert into housing for the homeless or those at risk of homelessness.

There weren’t a huge number of deals with the Homekey project in the first part of the year, but that’s due to how the approval and funding process works, so those deals should be completed in the second half of 2022, Reay said.

There are companies that specialize in buying hotels, and even office buildings, to convert them into apartments, he said. Often hotels are in the economy segment, and extended stay hotels are a target especially because of the ease of converting them since they already have kitchens.

Two important factors affecting hotel valuations are the recession, which hurts hotels more than other commercial property categories due to the hotel daily rate business model, and oversupply, which is generally not a problem in California, Reay said.

Working with Atlas clients, Reay said he has informed them that there has been a sharp increase in the cost of debt over the past 45 to 60 days. This affects what people can pay for a hotel and the return they can expect to get.

“So either net operating income has to go up for your prices to go up, or you have to adjust your expectations down,” he said.

Not only are interest rates rising, but lenders are pulling out of office buildings and hotels, Reay said. With fewer lenders available, that means the cost of borrowing goes up. Those who remain active become more conservative, forcing them to invest more equity.

“As all of these things add up, it’s causing a bit of a shrinkage in the pool of buyers,” he said.

Similar to the housing market, there were plenty of buyers willing to come in with cash and above the going price, he said. This was not sustainable, and buyers are now showing up more aggressively on their terms.

“We can see in the second half of the year a bit of a disconnect between what sellers want, looking back six to 12 months, saying, ‘These are the prices hotels were selling at back then.’ , and it’s going to take a while maybe they have to adjust to the new pricing structure,” he said.

Buyers are also using worries about a recession as part of their price trading strategy, Reay said. Sellers are looking to the future and in some cases selling hotels for less than they originally paid because they fear a longer recovery or selling later for less than they would now.

“As you start to see some of these assets trading like this, buyers are going to use it, they’re going to use it as new sell items,” he said.

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