In a sign that the hotel industry is in for a long recovery, one global investment firm decided to cut its losses and sell an asset at nearly fifty percent discount from what it paid just over five years ago. In December of 2015, CBRE Global Investors paid $154 million to acquire the 421-room luxury hotel Pullman San Francisco Bay Hotel (then carrying the Sofitel brand) in Redwood City. On April 1st of this year, CBRE sold off the property to an entity affiliated with Philadelphia-based Arden Group for just $82.25 million, according to public records.
In December of 2015, when CBRE acquired the hotel from a joint venture of Prudential Real Estate and Lodging Capital, The Registry reported that hotel industry in the region was perhaps the best in the country. Sales of hotel properties in California reached a record dollar volume of more than $4.4 billion in the first six months of 2015, a 64 percent increase over the same period in 2014, according to Atlas Hospitality Group’s then-recently completed 2015 Mid-Year California Hotel Sales Survey. Median sales price per room had increased 25 percent, and 13 deals traded in $100 million-plus range versus four for the same period in 2014.
The average Northern California hotel sale was nearly $21 million or $131,000 per room, which was a 13.74 percent increase over the year before, according to Atlas’ report. The Pullman at that time traded for $367,000 per room.
Since the start of 2020, the hospitality sector has been hit noticeably hard by the pandemic, and all aspects of the industry came to a screeching halt during that year. The disruption caused by COVID-19 has hospitality developers, operators and lenders alike strongly weighing the pros and cons of the market. Many projects in the hospitality pipeline may never come to fruition, according to a new report released by Irvine, Calif.-based Atlas Hospitality Group, and the sector’s complete recovery could take several years.
Many hotels—especially those in urban cores—are heavily dependent on weekly business traffic from convention centers and companies, according to the report. Markets like San Francisco and San Jose have been classified as some of the hardest hit in the state. Those markets also usually see a lot of international travel, another source of revenue that has practically dried up.
Developers and property owners are now pivoting away from hospitality to product types that can remain more stable in the long run, especially multifamily, although at this time, it is not clear if the new ownership of the Pullman will pursue that strategy.
“A lot of developers are looking at alternative uses, and a very high percentage is looking at residential, either multifamily or condos,” noted Alan Reay, president of Atlas Hospitality Group. “The reason for that is that because both retail and office have taken a beating during this pandemic, and they’re probably second and third in terms of depressed values to just the hotel market.”
While Reay expects a surge in leisure travel as vaccinations are widely distributed and the coronavirus is better controlled, the future of the office and work from home strategies will remain a long-term challenge for hospitality.
“We’re finding it interesting that in Silicon Valley, there are a lot of companies moving out of the city and a high percentage of people working from home,” said Reay. “We have a vaccination, but questions are going to remain that even when the pandemic flips, if business is going to remain the same.”
If companies decide to shed office space—a strategy which Reay has seen considered by many in the industry—hospitality will need to adjust to make up for lost revenue.
“That is not good for the urban core, and that is not good for downtown hotels,” added Reay.
An indication of this restructuring is already under way across the region. In March of this year, the entity that operates the landmark San Jose Fairmont Hotel filed for Chapter 11 reorganization and closed the hotel in order to find a management partner and extend the existing mortgage debt. It was a day when the Las Vegas Golden Knights hockey team was kicked out the hotel the afternoon of their game against the San Jose Sharks.
The San Jose team lost.