According to the California Hotel Sales Survey 2021 Year-End, there were 510 hotel sales for the year, rising 71 percent from 2020 and surpassing the previous high of 399 deals set in 2014.
The overall monetary volume was $9.93 billion, up 204 percent from last year and surpassing the previous high of $9.5 billion set in 2015. The Montage Healdsburg was the most costly deal in the state, costing $265 million.
The state has established a number of new marks for key pricing. The median price per key increased by 23% from 2020 to $137,877, surpassing the previous high of $121,907 set in 2019.
Thirteen purchases featured a price of $1 million each key, which is a new high, and it includes the Alila Ventana Big Sur, which was sold twice for more than $2.5 million each time. Another record was set when three hotels sold for more than $2 million per key.
According to Atlas President Alan Reay, the state of California has never sold more than 400 hotels previously, but they will do it in 2021. Deal volume in the state is typically in the low to mid-300s. In terms of overall monetary volume, hotel sales generally range from $5 billion to $10 billion.
The Montage Healdsburg; the La Quinta Resort & Club, Curio Collection by Hilton; the Alila Ventana; the Luxe Rodeo Drive Hotel in Beverly Hills; and the Four Seasons Resort and Residence Napa Valley were among the high-priced deals that helped drive up dollar volumes and prices per key in the state, but many of the deals that increased the total sales number involved smaller properties.
Portfolio sales, such as the sale of Extended Stay America and its paired-share real estate investment trust, ESH Hospitality, as well as CorePoint Lodging, were one of the key causes driving up the deal total, he added. More than 500 hotels around the United States were featured in the Extended Stay America offer, with many of them in California.
“Those assets are going for a lot of money per room,” he added. “It’s been a pretty quick shift from people who have owned those for a long time to people who have had them open in the last few years looking at what they thought it could trade for and then selling today because it’s selling for such a large premium over what they underwrote those projects for when they first built them.” He stated that Blackstone’s sale of pools of Motel 6s accounted for a big chunk of the 2021 deals.
California’s Project Homekey provides money in 2020 for local and state governments to purchase 78 hotels for $890 million and convert them into homeless homes.
Because of the program’s purchase and conversion of so many California hotels, the state’s hotel supply fell in 2020, owing to a smaller number of new openings. According to Atlas data, Project Homekey only paid for one hotel this year.
Despite the fact that some properties are under contract, the process of closing agreements is taking significantly longer, and many will take place in the first quarter of this year, according to Reay.
The speed with which the state moved on hotels in 2020, as well as how liberal the evaluations were, has sparked a lot of criticism. The programme had been paying over market value, claiming that the sale prices were still lower than the cost of purchasing land and building dwellings from the ground up.
People are paying more attention to the trades today, and underwriting and assessments must go through a review procedure, slowing down certain transactions, he added. Local businesses and citizens have also expressed concerns about hotels in their areas being converted to homeless housing.
“There’s clearly more resistance than there was in the first round,” he added, “and that’s because people have something to compare it to today.”
The money pursuing properties in California isn’t coming from outside the country, and it isn’t coming from owners who sold a hotel through Project Homekey with the intention of using the proceeds for another acquisition, according to Reay.
The number of first-time hotel purchases in the state set a new high, with the great majority of them coming from private equity.
According to Reay, private equity firms gathered billions of dollars in expectation of a flood of foreclosures, which never happened. Investors realize that depositing their money in the bank would yield them nothing, so they buy hotels instead.
“Private equity is coming out and placing money and finding that, even at high prices and low cap rates, they can create a greater return for their investors than they could if they just put it in the bank,” he added.
Other players have joined the space as a result of the Project Homekey conversions, according to Reay. They are purchasing hotels with the intention of transforming them into low-income housing.
California, like the rest of the country, is under pressure to provide more affordable housing. Because of the high expenses of creating new homes and the scarcity of appropriate places, state and municipal governments have been increasingly receptive to these conversions.
According to him, these conversions are reducing supply in the economy and midscale categories, and no one is building cheap hotels.
With the worst of the epidemic largely behind them, hotel owners who hung on to their properties have the remainder of the recovery ahead of them, which means they won’t have to worry about distressed sales. However, there are a variety of reasons why property owners are looking to sell.
Owners who are becoming older and realising they can’t work as hard as they used to and whose children aren’t interested in taking over the family firm are one source of inspiration, according to Reay.
“So, we have those folks selling out and wanting to replace that money in triple net, at the very least, less management intensive assets and to take a little more time off,” he explained.
Other hotel owners are selling because they witnessed a decline in revenue as a result of COVID-19 and checked their financial sheets, worried about how they’ll be able to service their debt, make payroll, and meet other obligations, he added. The prices demanded by competing hotels have provided a potential exit plan.
Owners who purchase and sell to keep trading up fall into the third type, according to Reay.
“The prices that were created in 2021 exceeded everyone’s expectations, and I believe the key driver was pricing,” he stated.
Deals for 2022
His agency hasn’t observed a slowdown in inquiries for hotel deals so far this year, and there are still more buyers than sellers now. He anticipates high buyer demand to continue in the first half of the year, and that finding suitable hotels would be a challenge.
He believes that if the projected interest rate hikes occur in March and then again in the middle of the year, there will be a halt in transactions. There is always a lag between the increase in the cost of money and the increase in the cap rate a buyer pays for a hotel.
Similarly, there is always a lag between an owner seeing a house next door selling for $300,000 per room and believing they can sell for the same price.
“There will be a gap between buyer and seller expectations,” he said, “and I believe we’ll see a downturn in the second half of the year.”
Interest rate hikes aren’t expected to speed up deals, according to Reay. The raises aren’t like deadlines for 1031 exchanges or tax law changes that take effect the next year.
Buyers have benefited from historically low interest rates on hotel loans, and a quarter- to half-point hike from the Fed translates to higher loan interest rates, he added. A half-to-one-point increase in debt service equals a 25% increase.