Although the pace of hotel sales slowed statewide in the first half of the year, California still set a new record for price paid per room. San Diego, however, was an exception. It saw a decline of almost 12 percent.
Atlas Hospitality Group, the Orange County brokerage that tracks hotel transactions statewide, cautioned that six months is not necessarily a complete picture of what lies ahead for California’s hotel real estate market. Atlas chairman Alan Reay predicts transactions will slow significantly for the rest of the year as rising interest rates and uncertainty about the economy curb landlords’ interest in parting ways of its properties.
In San Diego County, 25 hotels traded hands in the first half of this year, compared with 28 a year earlier, a decrease of nearly 11 percent, Atlas said in its sales report recently published mid-year. But when measured by the number of rooms, the decline was steeper: from 3,567 in the first half of 2021 to 2,384 this year, a drop of 33 percent, Atlas reported.
Since many of the hotels that sold this year tended to be more of a mix of budget and mid-range properties, the total value of this year’s 25 transactions ($326.5 million) was considerably less than the previous year, with a drop of 42 percent. Statewide, the total dollar value of sales fell 34 percent, while the number of individual hotel sales declined 10 percent.
For San Diego County, the drop in sales is not a reflection of an underperforming hotel market, Reay emphasizes.
“Overall, we had a record average room price for California, and even though it was down in San Diego, I wouldn’t say that means people are off San Diego,” he said. “The fact that we’ve still seen a lot of dollar volume is a reflection of how strongly the market recovered from COVID. And owners may have looked at selling and getting out of the market before, but now we’re seeing the opposite.
“The owners say that if I sell, what do I do with the money? You have fewer sellers in San Diego because, outside of San Diego, they don’t see hotel markets that offer the same long-term advantage as your area.”
The average price per room among all sales in California was $143,443. That’s still well below some of San Diego’s higher priced transactions this year.
The county’s most expensive sale was the 126-room Moxy, a trendy Marriott boutique hotel that opened nearly four years ago in the East Village. The eight-story property on Sixth Avenue sold for $46 million. The second most expensive sale was the 90-room Inn in Rancho Santa Fe, which sold for $42.7 million. That translates to a cost of $474,444 per room, the highest for San Diego County sales recorded in the first six months of this year, according to Atlas.
The most expensive hotel to change hands in California was the now-shuttered, 295-room Fashion Island Hotel in Newport Beach, which sold for $145 million. It is due to reopen next year as Pendry Newport Beach.
In the coming months, Reay predicts there will be a slowdown in sales activity, assuming interest rates remain high.
“With interest rates rising by a couple of percentage points, that means that to get the same cash flow, sellers have to price hotels lower, and the prices people are willing to pay have to go down,” said Reay. said “In a market like San Diego that doesn’t have any level of distress, landlords say if I can’t get my price, I’m not willing to sell.”
Pebblebrook Hotel Trust, a real estate investment firm that owns seven properties in San Diego, including resort hotels in Mission Bay and Del Mar, is focusing more on selling assets than buying them, Chief Financial Officer Raymond Martz said. However, it recently acquired the Inn on Fifth in Naples, Florida for $156 million and the Gurney’s Newport Resort & Marina in Newport, Rhode Island, for $134 million, he said.
Looking ahead to the rest of the year, Martz said he expects Pebblebrook to be “more of a net seller than a net buyer.”
The company recently sold a hotel it owned in Philadelphia and has two other properties under contract for $104 million.
“We’ve seen prices come down a few percentage points, but nothing really significant,” Martz said. “We feel we’ve done a good job of maximizing the value of these assets that we’re selling and we can use that to fund recent acquisitions and also reduce debt.”
San Diego, he said, is recovering strongly from the pandemic compared to other markets. While Martz couldn’t say what, if any, plans the company has for its San Diego holdings, he said Pebblebrook is quite bullish on the market.
“We really like this market,” he said. “If you sell, you may not be able to buy again.”