Over the past several years, California’s hospitality industry has undergone a number of changes from the challenges of the COVID-19 pandemic to record high hotel sales prices in 2021. Recently, The Registry interviewed Alan Reay, president of Newport Beach-based Atlas Hospitality Group, to learn more about how these trends impacted the industry during 2022 as well as how they may impact the industry moving forward.
While 2020 led to many challenges for the hotel industry, 2021 saw a number of major transactions as well as the continuation of stalled developments throughout California. What trends can you say have emerged during 2022 that are of note?
2021 was a record year for California hotel sales, in terms of total number of transactions, total dollar volume and highest price per room ever paid. In 2022 sales are down but only slightly. We still saw very strong buyer demand, especially from buyer’s looking to complete 1031 exchanges and investors focussed on travel & leisure hotels.
What do you think will happen in 2023 in terms of hotel investments?
Sales will decline, as buyer and seller price expectations will continue to widen due to the rapid increase in interest rates/ cost of financing. a number of lenders have pulled out of the hotel finance market which is putting additional downward pressure on sales.
What about developments?
If a developer does not already have construction financing in place then they will find it very difficult as most lenders have completely pulled out of new hotel construction financing. In addition, the jump in construction costs is making it very difficult to make new hotel projects pencil out.
Which markets would you say experienced the most growth in 2022 in terms of both investments and developments?
Los Angeles County, followed by Riverside County, Alameda and Santa Clara Counties experienced the most growth in new hotels in 2022. From an investment standpoint, investors were very focussed on the drive to markets that specialized in leisure business- coastal, wine regions, ski and desert communities.
What surprised you the most over the last 12 to 18 months? Do you think that trend will continue into 2023 and beyond?
What surprised us the most was the record number of sales and the prices that buyer’s were willing to pay, the median price per room in California is now over $137,000 per room, a new record. We do not expect this trend to continue due mainly to the higher cost of borrowing and less banks in the market willing to finance hotel purchases.
As you look at the market dynamics in 2023, what do you think will be the most significant things that will define the industry in the coming year?
First and foremost it will be the cost of borrowing that will have a major impact on sales and pricing. Secondly, we expect to see a lot more lenders selling off hotel loans in 2023 and more distress in the market than we have seen over the last two years
Is that worrisome? Why or why not?
It is worrisome, hotel owners that have loans maturing or have variable loans tied to prime are going to be put under tremendous pressure, especially if we do enter a recession- even without a recession they will see a lot of pressure. Combine this with the difficulty of finding labor and the rising cost of wages, it is not going to be anything like the last two years.
What opportunities do you see in the coming year for those looking to invest in California’s hospitality market?
Cash is going to be king once again, we will see a lot more sales from lenders which will be very attractive to opportunistic/value add buyers.Secondly, so many hotels have now been purchased and converted to other uses, mainly apartments that the supply of “affordable” rooms in most markets is way down, so we see this as an attractive market segment for investors. When supply is constrained it usually helps push up values.
A year from now, what do you think we’ll be talking about?
How high the prices were back in 2021!