Even as the pace of hotel sales slowed across the state the first half of the year, California still hit a new record high for the price paid per room. San Diego, though, was an exception. It saw a nearly 12 percent decline.
Atlas Hospitality Group, the Orange County brokerage that tracks hotel transactions statewide, cautioned that six months isn’t necessarily a complete picture of what’s ahead for California’s hotel real estate market. Atlas President Alan Reay is predicting that transactions will decline significantly during the remainder of the year as rising interest rates and uncertainty about the economy dampen owners’ interest in parting with their properties.
In San Diego County, 25 hotels traded hands in the first half of this year, compared with 28 a year earlier, a decline of nearly 11 percent, says Atlas in its newly released mid-year sales report. But when measured by the number of rooms, the decline was more pronounced — from 3,567 in the first half of 2021 to 2,384 this year, a drop of 33 percent, Atlas reported.
Given that 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 lower than a year earlier, falling 42 percent. Statewide, the total value of dollar sales fell 34 percent, while the number of individual hotel sales declined by 10 percent.
For San Diego County, the drop-off in sales is not a reflection of a poorly performing hotel market, Reay stresses.
“Across the board, we had a record median price per room for California and while it declined in San Diego, I wouldn’t say that means people are turned off by San Diego,” he said. “The fact we’ve still seen a big dollar volume is a reflection of how strong the market rebounded from COVID. And maybe owners had looked at selling and getting out of the market before, but now we’re seeing the opposite.
“The owners are saying 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 would offer the same longer-term upside that your area has.”
The median price per room among all California sales was $143,443. That’s still far lower than some of San Diego’s higher-priced transactions this year.
The priciest sale in the county was the 126-room Moxy, a hip boutique hotel by Marriott that opened nearly four years ago in East Village. The eight-story property on Sixth Avenue sold for $46 million. The second most expensive sale was the 90-room Inn at Rancho Santa Fe, which sold for $42.7 million. That translates to a cost of $474,444 per room, the highest of the San Diego County sales recorded during 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 the 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 moving up a couple of percentage points, that means in order to get the same cash flow, the sellers have to price the hotels at a lower price, and the prices people are willing to pay have to come down,” Reay said. “In a market like San Diego that doesn’t have any levels of distress, owners are saying 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 purchasing them, said Chief Financial Officer Raymond Martz. It did, however, recently acquire the Inn on Fifth in Naples, Fla., 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 will 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 it owns under contract for $104 million.
“We’ve seen prices down a few percentage points but nothing really significant,” Martz said. “We feel like we’ve done a good job maximizing value on these assets we are selling and we can use that to fund recent acquisitions and also reduce debt.”
San Diego, he said, is rebounding strongly from the pandemic compared to other markets. While Martz could not say what, if any, plans the company has for its San Diego holdings, he said Pebblebrook is quite bullish on the market.
“We love that market so much,” he said. “If you sell, you may not be able to buy again.”
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