Just Can’t Get Enough of San Francisco Hotels

Atlas Hospitality Group, California Hotel Sales Survey, Northern California, San Francisco, Alameda County, InterContinental, Sonoma County, Oakland, Marriott City Center,

By Jon Peterson

Two more San Francisco boutique hotels are trading hands, both within the same block of Sutter Street within short walking distance of Union Square.

The 94-room Hotel Rex at 562 Sutter St. is expected to sell today to Bethesda, Md., -based DiamondRock Hospitality Co. for $29.5 million, or $313,000 a room.

Meanwhile, the 114-room Larkspur Hotel Union Square at 524 Sutter St. has sold for $16.6 million, or $145,000 a room.

The properties are the latest to change hands in the city in the vicinity of Union Square. Earlier this month, Maryland-based Pebblebrook Hotel Trust said it had bought the Hotel Palomar at 4th and Market streets just south of the famed shopping district. The company said it paid $58 million, or not quite $300,000 a room. In April it bought the neighboring Hotel Milano, paying $275,000 a room.

The sellers of the Hotel Rex are Mill Valley-based House Properties and two San Francisco-based firms, Skyline Pacific Properties LLC and Joie De Vivre Hotels, a hotel management company.

“We sold the property for two reasons. One, there appears to be a great deal of investment capital looking to buy hotels. The property also needs some work, and we would prefer that the new buyer completed this work instead of us,” said Mike House, founder of House Properties.

DiamondRock secured a 5.5 percent going-in capitalization rate, or yield, based on the current income produced by the hotel, House said. The property sold all cash.

The sellers owned the property since 2005, paying $16.8 million. The hotel had an average annual occupancy rate of 83 percent and an average daily room rate of $175. Revenue per available room at the hotel was up by 15 percent versus the same time last year.

“The property is one-and-a-half blocks from Union Square. This means it is close enough to the square, but is far enough away so it is quiet,” House said. The hotel attracts both leisure and business travelers including those drawn by its small amount of meeting space. To enhance value, the new owners could open a new restaurant, House said. Joie De Vivre expects to remain as the hotel manager.

According to its Web site, DiamondRock only owns one other hotel in the San Francisco Bay Area, the 182-room Lodge at Sonoma Renaissance Resort & Spa in Sonoma. The publicly traded real estate investment trust owns 26 hotels nationwide with 11,500 rooms.

Larkspur Hotels in Larkspur and San Francisco-based Farallon Capital were the sellers of the Larkspur Hotel Union Square. The new owners are a group of Canadian investors represented in the transaction by The Ehmer Group, a hospitality investment services company based in San Francisco.

“There were several reasons for the price per room being lower than some of the other hotel assets that have traded hands recently near Union Square,” said Richard Ehmer, president of The Ehmer Group. “One is that the Canadian group has a higher cost of capital than does a public REIT. This doesn’t allow them to pay as much for properties. There also was the fact that the Larkspur Hotel has unionized employees, which affects the overall cash flow of the property.”

The sale yielded a 7.25 percent cap rate based on the property’s current income, Ehmer said. Average annual occupancy is 80 percent, and the average daily room rate is of $151.

Louis Stervinou, a managing director with Eastdil Secured in its San Francisco office, represented the sellers.

The Canadian group expects to return the hotel’s name to its original: The Cartwright Hotel. The investment company is based in Vancouver, Canada. “The company owns hotels and apartments in Canada and in Seattle and was very much interested in finding a property to buy in San Francisco,” Ehmer said.

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