San Francisco Hotel Palomar Sells for $300,000 a Room

By Sharon Simonson

Maryland-based Pebblebrook Hotel Trust has acquired San Francisco’s Hotel Palomar for $58 million, or not quite $300,000 a room.

The seller was El Segundo-based Griffin Capital Corp., which was the sponsor of a tenant-in-common ownership platform that bought the hotel for $36.3 million in August 2007.

The deal represents a “win-win” for Pebblebrook and Griffin, which performed what it describes as Herculean feats to keep the hotel from going back to lenders during the depths of the recession. In the end, the hotel’s investors reaped returns of more than 167 percent on their originally invested equity, Griffin said.

“One of the great things about commercial real estate is that when you are fortunate to buy and invest in a property like this, where it enjoys the positive economic growth from a place like San Francisco’s South of Market, you can get a win-win. Our investors got an attractive return, and they got a great hotel,” said Griffin Capital President David Rupert.

The Palomar was the company’s sole hotel.

Pebblebrook calculates that the hotel will produce net operating income—after funding capital reserves—of $3.4 million to $3.8 million in the next year. The company owns a leasehold interest on the land for the hotel with 85 years of remaining term through a long-term agreement with Jamestown Properties, another active San Francisco and Bay Area investor.

Pebblebrook also assumes a $27.2 million secured, non-recourse loan with a fixed annual interest rate of 5.94 percent. The loan matures in September 2017. The company has a regularly scheduled conference call with investors at 9 a.m. Eastern time Oct. 26 to discuss its third-quarter results, almost certainly including the details of this purchase.

Last year, the Hotel Palomar operated at 81 percent occupancy with an average daily room rate of $222 and revenue per available room of $178, according to a news release from Pebblebrook.

Pebblebrook has bought aggressively in San Francisco beginning in June 2010 when it acquired Union Square’s iconic Sir Francis Drake Hotel, paying $90 million, or $216,000 a room, for the 416-room historic property, according to the company. That purchase was followed in February 2011 with the $84 million buy of the Argonaut Hotel near the city’s Fisherman’s Wharf.

In April, Pebblebrook bought the 108-room Hotel Milano for which it paid $29.8 million or $275,000 a room. The Milano and Palomar, at 4th and Market streets in San Francisco, are on the same block.

Griffin Capital owns and manages U.S. properties valued at nearly $2 billion. Its Bay Area holdings include single-tenant office and industrial buildings in Emeryville and a single-tenant office building on the Peninsula. The company is interested in buying more Bay Area real estate, Rupert said, and is focused on acquiring single-tenant fully leased buildings for their stable income.

“In general we are huge believers of all of the economic drivers in the Bay Area. To us the companies there are of the future as opposed to other parts of the country where they are living on the fumes of the past,” Rupert said.

West Coast Commercial Real Estate News