In 2021, California’s hospitality industry saw unprecedented interest as both investors and lenders showed a resurgence in their interest toward the sector. According to a year-end hotel transaction survey from Atlas Hospitality Group, 2022 is expected to proceed with even more optimism, with the report showing record numbers of transactions across the state.
“These are pretty big numbers, over 500 transactions just under $10 billion worth of sales,” Alan Reay, President of Atlas Hospitality Group, said. “We also had a record number of hotels selling in excess of a million dollars per room. There were 13 transactions last year where the prices were over a million dollars per key. That beats the entire total for the last 10-plus years.”
By the end of 2021, the state recorded 510 sales, approximately 71 percent more than the previous year. This brought the total dollar volume of hotel sales up nearly 204 percent to $9.93 billion. At the same time, hotels also increased in price bringing the new record for median price per room up 23 percent to $137,877.
Atlas Hospitality Group suggests there are many reasons for the record sales numbers. However, the main reasons are likely due to low interest rates for hospitality properties and the large amounts of investment capital available.
“There was a tremendous amount of capital raised in 2020 on the expectation that there was going to be a wave of foreclosures, and that just did not materialize. So, a lot of companies were sitting on tremendous amounts of capital and they came into the market. The reason that they like California is the barriers to entry. It’s very, very tough to build in this market, and they’re seeing this as a good hedge against inflation,” Reay said.
Both Northern and Southern California saw the effects of these conditions, with the report showing a significant spike in hotel sales for both regions. Northern California saw a 78.2 percent increase in sales year-over-year, ending 2021 with 237 hotel sales compared to 133 the prior year. In Southern California, hotel sales increased by 65.45 percent, ending the year with 273 transactions as opposed to 165 at the end of 2020.
The highest per-room price observed in California was in Monterey County, where the 59-room Alila Ventana Inn & Spa in Big Sur was sold to Host Hotels & Resorts for $150 million, or about $2.5 million per room.
However, Los Angeles County led the state in both the amount of transactions as well as the largest total dollar volume. According to the report, 77 hotels were sold in Los Angeles County during 2021 for a total dollar volume of more than $1.8 billion. Los Angeles County hotel transactions increased 26.2 percent in 2021, as opposed to 2020, when 61 hotels were sold. Total dollar volume also went up 145.5 percent. The most expensive sale in Los Angeles County was the 88-room Luxe Hotel Beverly Hills, which was sold by the Harkham family for $200 million, or just over $2.2 million per room.
Suburban markets also saw significant increases, due to the types of properties being developed there. According to Reay, outlying portions of Los Angeles saw increases in transactions as more guests opted to stay in these regions as opposed to downtown areas that rely more heavily upon business travel.
Orange County, for instance, reported a 152.6 percent increase in hotel transactions, from 19 hotels sold in 2020 to 48 in 2021.
San Bernardino County also saw a 57.9 percent increase in transaction activity, from 19 hotels sold in 2020 to 30 sold in 2021. Total dollar volume also went up 68.5 percent.
“We’re seeing it more in suburban markets, less so in the downtown markets, and that’s understandable because of the hits that they’ve taken; definitely also in the drive-to markets, like Palm Desert and Palm Springs. These are areas that have, quite honestly, bounced back extremely strongly from 2020 numbers,” Reay said.
While suburban markets came out on top, other regions of the state that rely heavily on business travel did not see as many transactions. San Francisco County, for example, saw a 33.3 percent decrease in transactions, from nine in 2020 to six in 2021. However, total dollar volume in the county increased significantly at nearly 200 percent year-over-year. The average price per room increased 69.6 percent, and the median price per room was up 96.5 percent by the end of the year. In 2021, the most expensive hotel to sell in San Francisco was the 360-room Le Meridien San Francisco, which was sold by Park Hotels & Resorts for $221.5 million, or $615,277 per room.
“The one area that sort of lacks is in the city of San Francisco. On the one hand, you look at that and think that it’s understandable, because the city relies heavily on international tourism and convention business. Because it’s been so depressed in that market, it’s hindering values or buyers coming in. Having said that, there have been some transactions in the city that were at prices that really go back to 2018 and 2019, in terms of what the values would have been back then,” Reay said.
While some markets showed signs of decline, the overall trends show a positive future for California’s hotel industry. Atlas Hospitality suggests these trends will continue based on investment activity already observed in early 2022.
“During the next six months, I don’t think we’re going to see a letup, ust in terms of the activity that we’re tracking and seeing and the amount of buyers, especially 1031 Exchange players. I see that continuing through the first half of 2022,” Reay said.