Northern California hotel purchases cool off, nosedive looms statewide

SAN JOSE — Hotel buying activity cooled off in Northern California, including in the Bay Area, during the first six months of 2022, a slump that might worsen during the rest of this year, an unsettling new report says.

During the first six months of 2022, the dollar volume for purchases of Northern California hotels totaled slightly less than $1.03 billion, which represented a plunge of 63.4% from the $2.8 billion in hotel deals during the first half of 2021, according to a report released by Atlas Hospitality Group, which tracks the lodging market.

Southern California’s hotel market experienced a 1.3% rise in the dollar volume of lodging deals, Atlas Hospitality reported. Hotels in Southern California hauled in $2.42 billion in total purchases during the first six months of this year, compared with $2.39 billion in the first half of 2021.

Northern California’s weakness dragged down the statewide results.

During the first six months of 2022, California hotel purchases generated $3.45 billion in transactions, which was a steep slide of 33.6% from the record $5.19 billion in hotel deals in the first half of 2021, Atlas Hospitality reported.

Ominously, hotel buying activity could plunge even further from the current levels, the report said.

“As we move into the second half of the year, we are predicting a large decline in sales,” Atlas Hospitality stated in its report.

Multiple factors are likely to depress hotel purchasing activity in California, the hotel analyst warned.

“Interest rates have moved a lot higher in the last 60 to 90 days,” said Alan Reay, president of Atlas Hospitality. “That has an impact on pricing.”

Hotel investors can typically find an array of commercial real estate assets other than hotels to purchase, such as office buildings, research sites and industrial properties.

Rising interest rates mean that it’s getting more expensive for buyers to borrow money to finance purchases of real estate. That, in turn, means monthly mortgage payments would rise for a property buyer.

It also means the primary way for a buyer to achieve a satisfactory rate on an investment in a commercial property is to coax the seller to shave the price of the real estate. A similar principle applies to residential real estate purchases, Reay noted.

Another specter that has begun to haunt the hotel sector is the increasingly wobbly and uncertain economy in the Bay Area, California and nationwide.

“Lenders and buyers are looking at a potential slowdown in the economy and a potential recession,” Reay said. “That makes lenders nervous. It makes buyers nervous. Lenders are pulling back from making loans on hotels.”

In the Bay Area, the biggest hotel deals in the first half of the year involved a varied group of lodgings, the report showed. Among the highlights for the first half of 2022:

— Hyatt Place, a 230-room hotel around the corner from the Oracle Park baseball stadium in San Francisco’s China Basin district, was bought for $142 million, or nearly $617,400 a room.

— Westin San Jose, a 171-room downtown San Jose lodging that for decades was known as the Sainte Claire hotel, was bought for a total value of $62.3 million, or more than $364,300 a room. The price was 2.7% below the prior purchase prior of $64 million in 2017.

— Dawn Ranch Lodge, a 58-room hotel in the Sonoma County town of Guerneville that’s part of the Russian River resort area, was bought for $20.3 million, or $350,000 a room.

In the wake of the coronavirus outbreak, hotels in leisure and resort areas such as Sonoma County, Napa County and Monterey County have fared better than hotels in regions such as Santa Clara County and San Francisco that depend primarily on business travel.

Despite being in a resort region, the Dawn Ranch Lodge purchase is a far cry from record prices that topped $2 million for three mammoth deals during 2021 involving a hotel perched on Monterey County’s Big Sur Coast and two Wine Country hotels.

Santa Clara County suffered significant weakness during the first half of 2022 compared with the same six-month period in 2021, Atlas Hospitality determined.

“Investors had looked at Silicon Valley as the place to own hotels, but they are taking a different look at Silicon Valley now,” Reay said. “We are still seeing a lot of remote work in Silicon Valley, which means business trips are less frequent” than before the onset of the coronavirus.

Santa Clara County hotel purchases totaled $188.7 million during the first six months of 2022, a 68.6% decline from the $600.4 million from the first six months in 2021.