Reports: Hotel Sector Hit Hard During Q2, Forcing Developers and Lenders to Rethink Future Projects

Atlas Hospitality, San Francisco, Cove at Oyster Point South San Francisco, NewPark Mall Hotel Newark, Hilton, Comfort Inn
Luma Hotel Mission Bay, San Francisco’s largest hotel under construction. Courtesy of Hornberger + Worstell.

By Meghan Hall

Hospitality took a hard hit during the second quarter, with health and safety concerns limiting both travel and business operations. When and how the industry will recover is ultimately a product of time, but two new reports issued by Irvine, Calif.-based Atlas Hospitality Group reveal how developers, property owners and hoteliers are viewing the market, and what may lie ahead for the sector.

“Obviously it is a big change from where we were at the end of last year with the pandemic and everything else that’s been going on with it,” explained Atlas Hospitality Group’s President Alan Reay. “…We’re not seeing dramatic results in the [construction] survey, but you will see that in the sales survey. Sales have been impacted immediately because of market conditions.”

Through the first six months of the year, the number of individual hotel sales decreased by 21 percent, and total dollar volume dropped more than 53 percent. The California median price per room also decreased 13 percent. Atlas Hospitality noted that between April and June of this year, the decline was particularly acute: When compared with the same period last year, dollar volume of sales were down 82 percent, total number of individual sales were down about 45 percent, and the median price per room dropped 22 percent. 

The report notes that the California hotel sales market suffered the steepest decline in sales on record to the COVID-19 pandemic, and the Bay Area—often insulated from downward pressure due to its vibrant economy—was no exception.

San Francisco County suffered the most, as individual sales decreased 57 percent and dollar volume 92 percent. The median price per room dropped 53 percent. The most expensive sale was the 84-room Entella Hotel, which traded for $11 million. 

Over in Alameda County, individual sales were flat, but dollar volume and median price per room were down 76 percent and 63 percent, respectively. Just one sale occurred in Alameda during the first half of 2020, prior to coronavirus, with the Comfort Inn Fremont selling for $16 million.

In Santa Clara County individual sales remained flat, with four transactions. However, both dollar volume and the median price per room declined. The two fundamentals dropped by 14 percent and 20 percent, respectively. The only hotel sale between April 1st and June 30th was the sale of the 355-room Hilton San Jose, which traded for about $117.6 million.

Sacramento County saw the only increases in the region, with sales volume up 300 percent and dollar volume up 262 percent. At the end of June, the median price per room increased by 46 percent. The most expensive sale was for the 100-room Hilton Garden Inn in Folsom for $13.65 million.

Atlas Hospitality believes that in the realm of hotel sales, 2020 will be one of the worst on record, as lenders, appraisers and buyers struggle to both value and finance transactions.

Hotel construction has not seen as drastic of a pause, although Reay suspects one may be coming.

“I think because the development cycle has such a long lead time, those projects that are already under construction are still moving forward,” said Reay. “We found that on the construction side, that probably is the one part of business and industry that is still very, very active.”

In the Bay Area, Santa Clara County led the way in hotel construction and had two hotels with 249 rooms open during the first half of the year, the largest which was the 144-key Hampton Inn & Suites at San Jose Airport. Seventeen hotels totaling 2,660 rooms are currently under construction, and the county has an additional 75 hotels and 11,299 rooms in planning.

Conversely, San Francisco County saw no hotels open during the first half of the year. Five hotels with 858 rooms are under construction, including the 250-room Luma Hotel at Mission Bay. An additional 52 hotels and 6,312 rooms are currently in planning.

Alameda and San Mateo counties sat in the middle. Alameda currently has 12 hotel projects, totaling 1,707 rooms, under construction. The largest project is the Residence Inn in Berkeley, which will bring 336 rooms to market. San Mateo has five hotels and 639 rooms under construction. Its largest project is the 200-key Cove at Oyster Point South San Francisco. Both counties also have numerous projects in the planning pipeline. Alameda has more than 50 projects in the entitlements pipeline, the largest of which is a 700-room hotel called the NewPark Mall Hotel Newark. San Mateo, by comparison, has 31 hotels in the planning stages.

However, it is the projects that are in planning that are most vulnerable moving forward. Reay added that many hotel owners are deferring openings if construction has already started and expects more owners to scrap their plans all together if entitlements and funding have not yet been procured.

“If a hotel developer is not already under construction, or has the construction financing in place, it is going to be extremely difficult for them to move the project forward,” stated Reay. “We are tracking projects that are in planning that are deferred or have been abandoned all together…It will be a relatively large number.”

Exactly how many projects will suffer is unclear, as Atlas Hospitality is still early on in measuring those impacts.

“I don’t [have numbers] and the reason for that is in the 25 years that we’ve been tracking this information, we’ve never once encountered it,” Reay added.

Instead, hotel developers are likely to pursue multifamily development—where financing is more available—or extended-stay hotel products, which due to their layout and apartment-like settings have fared better than traditional hotel rooms.

There is some good news: For existing hotel owners, less new supply gives the market a better chance to moderate itself in the months to come.

“It is just the typical laws of supply and demand,” said Reay, who said record construction in 2019 was putting downward pressure on average daily rates and occupancy. “We were already seeing that in 2019 with it being a record year for new inventory coming into the marketplace, and we were already starting to see the effect on hotels’ top lines as well as their NOI. Anything that puts a hold on new construction, that is always a good thing for existing hotel owners.”

West Coast Commercial Real Estate News