Right Time for Bay Area Hotel Construction to Speed Up

Atlas Hospitality Group California San Francisco Santa Clara Hyatt Place AC Hotel San Francisco Bay Area Hotels Rooms SoMA Mid-Market

By Jacob Bourne

Atlas Hospitality Group, a real estate firm specializing in the marketing and sale of California hotels, saw a hike in revenues, profitability and value for hotels throughout the state. While only 38 new hotels opened in 2016, there are now 679 in the planning pipeline and 112 under construction. According to the firm’s year-end report, zero hotels opened in San Francisco in 2016 and only one opened its doors in 2015. Santa Clara County gained two new hotels in 2016 compared to six in 2015.

“We’re seeing a very high demand from investors to build new product in the Bay Area,” stated Alan Reay, president, Atlas Hospitality Group. “There has been a shortage of new hotels in the Bay Area because of a long development process common in the region and long construction periods. Very expensive land costs, scarcity of land plus a difficult entitlement process creates a high barrier to entry for the market. There’s also an anti-development sentiment from some owners and residents.”

Reay explained that these barriers, which have resulted in a shortage have also driven up prices for the region’s existing hotels. These hotels are now selling above asset replacement costs, which in turn is fueling the present burst in development activity.

Of the handful of Bay Area hotels delivered in 2016, three were in the relatively less space constrained counties of Sonoma, Napa and Alameda, with another three in San Mateo and Santa Clara. Overall trends have shown a tendency towards favoring expansion projects of existing hotels and locating larger, new hotel projects outside of urban cores, especially near airports.

“It’s interesting because if you look comparatively at Manhattan, where there’s no land, they’re still building,” Reay commented. “When values skyrocket, developers get very creative. We’re not quite there in San Francisco yet, but it could be just down the road.”

“Right now I definitely see the highest values anywhere in the city if you can get a new hotel built. Silicon Valley is still very strong but people are a bit concerned about the number of product opening up,” he added.

All of the Bay Area’s nine counties currently have hotels going through the planning process, with a majority in Alameda, San Francisco, San Mateo, Santa Clara and Sonoma counties. Santa Clara tops the list with 46 hotels and 7,711 rooms on the way. Nineteen hotels are currently under construction in Alameda, Contra Costa, Napa, San Francisco and San Mateo counties to add 2,617 rooms. Most of the San Francisco projects are in the SoMa and Mid-Market neighborhoods, the largest being the Hyatt Place slated to add 230 rooms by late 2017 or early 2018. Santa Clara County’s largest new addition is the 210-room AC Hotel in Downtown San Jose.

In terms of total activity in California, 2016 matched closely in terms of the number hotels underway with 2007 figures. Across the state 150 hotels were opened or under construction last year geared to add 22,000 rooms, compared to 151 hotels and 23,000 rooms in 2007. A sharp decrease in activity occurred in 2008 during the Great Recession and continued until 2013. Perhaps making up for the drop in development during prior years, values are now closest to a peak with a record number of rooms on the way at a time when people are cautiously optimistic about the outlook of markets.

“Anywhere in the Bay Area is strong right now,” said Reay. “The top three locations are the East Bay, Santa Clara, San Francisco and coastal areas. California overall has a very strong hotel market with record profits.”

West Coast Commercial Real Estate News