California hotel buying spree reaches new heights – Orange County Register
“Bubble Watch” explores trends that may indicate upcoming economic and/or housing issues.
Buzz: It’s not just homes that are being swallowed up at a breakneck pace. A startling thirst for California hotels has helped break many sales records in the first six months of 2021 — a bet by investors that the woes of the pandemic-era tourism are nearly over.
Source: Semi-annual report tracking sales by Atlas Hospitality Group.
Let’s look at the scale of the hotel industry‘s buying spree…
Offers: 243 transactions in the first six months of 2021 broke the old record of 2017 by 42%. Compared to the depressed first half of 2020, sales increased by 157%.
dollars: $5.26 billion spent on these 2021 deals exceeded the previous record set in 2015 by 23%. Compared to January-June last year, total sales jumped $4.3 billion or 451%.
I emailed Atlas President Alan Reay about his report, simply writing “Wow.”
“‘Wow’ is an understatement,” he replied.
Just a year ago, most California hotels were closed or operating on a reduced scale as the closures dampened interest in travel.
The move from deathbed to boom surprised Atlas researchers, whose report said “no one could have predicted the kind of turnover and incredible rebound we saw.”
How “wow” was the hotel market in the four counties covered by the Southern California News Group? Watch the booming sales trends…
Los Angeles County: 48 transactions were recorded in the first half against 16 a year earlier. These transactions were worth a total of $911 million, up 606% year-on-year. Two hotels tied for most expensive sale – the 580-room Hyatt Regency LAX and the 175-room JW Marriott Le Merigot Santa Monica. Both sold for $75 million.
Orange County: 29 transactions against nine a year earlier; worth $529 million, up 255%. The most expensive ? 174-room Element Hotel Anaheim Resort at $65 million.
Riverside County: 20 transactions against 13 a year earlier; worth $139 million, up 81%. The most expensive ? 198-room Embassy Suites in Palm Desert at $21 million.
San Bernardino County: 15 transactions against 10 a year earlier; worth $83 million, up 23%. Most expensive: 200-room Residence Inn Convention Center Ontario at $24 million.
The January-June binge-eating surge was more pronounced in Northern California than in Southern California.
North: 141 hotels purchased, triple the 47 transactions in the first half of 2020. These sales were worth $2.8 billion, up 578%.
South: 152 hotels purchased, up 127%. Assess? $2.46 billion, an increase of 354%.
Reay told me that the selling frenzy is “a combination of an enormous amount of available investment capital and investors who believe California hotels offer some of the best long-term returns.”
“I think that plays into inflation hedging as well,” he said. “Hotels are able to change their rates on a daily basis, unlike retail, office and industrial properties which are typically locked into long-term leases, with caps on rent increases.”
The 59-room Alila Ventana Inn & Spa in Big Sur — a 160-acre resort where room rates can exceed $2,500 a night — has sold for $148 million. That price equates to $2.51 million per room, or 22% more than the previous California record per room set in 2019 by the 201-room Montage Beverly Hills.
On a scale of zero bubble (no bubble here) to five bubble (five alarm warning)… THREE BUBBLES!
Reay’s assessment: “We’re not there yet with residential home sales in California, but hotels are getting closer!”
He added that hotel valuations still look reasonable — even though the statewide median price per room jumped 13% to a record $127,647.
“It’s good, well below replacement cost,” he says. “A new hotel cost today in California, assuming ground-level parking, is over $200,000 per room, excluding cost of land and furnishings, fixtures and equipment. If you have to park underground, that jumps to $250,000 to $300,000 per room.
Second quarter hotel sales data. (Courtesy of Atlas Hospitality)
Jonathan Lansner is the business columnist for the Southern California News Group. He can be contacted at [email protected]. George Avalos of the Bay Area News Group contributed to this report.