Buyers gobbled up San Diego hotels at high prices in 2021
Even though the travel industry hasn’t fully recovered from the pandemic, lodging properties are seeing a surge in acquisitions at sky-high prices in San Diego and throughout California.
While prices have recently jumped for many assets – from residential real estate to used cars – the increases in hotel acquisition prices are surprising. Unlike homes and vehicles — where demand has outstripped a limited supply — hotel occupancy remains mired in the economic residue of COVID-19 travel restrictions. Business travel and conventions, in particular, have been slow to recover.
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In San Diego County, hotel occupancy averaged 61.4% last year, down from 76.6% in 2019 before the COVID-19 closures, according to the San Diego Tourism Authority.
Even so, a record number of individual hotels sold in San Diego County last year with 49 transactions, up 123% from the previous year.
And they went for a record median price per room of $145,900 — a 21% increase from 2020, according to a report by Atlas Hospitality, an Orange County-based industry research firm.
The trend spread across California, where hotel sales jumped 71% to 510 deals. The median price per room rose 23% to $137,900, said Alan Reay, head of Atlas Hospitality.
“Calling it a V-shaped recovery really doesn’t do it justice,” Reay said. “To have over 500 individual sell trades when California is typically in the 300 range, that didn’t just beat him by a small amount. It blew him up.
In San Diego, the biggest deal was the 340-room Embassy Suites La Jolla, which sold for $226.7 million, or nearly $667,000 per room.
BioMed Realty, owned by private equity firm Blackstone, has purchased Embassy Suites La Jolla. While Blackstone owns other hotel assets, BioMed does not. It specializes in technology and life sciences office buildings.
This has led to speculation about a possible redevelopment of at least part of the Embassy Suites property. Life science lab space is in high demand and primarily built in the Torrey Pines Mesa/University City area.
In a statement, BioMed said it plans to operate the Embassy Suites under the hotel’s current management through its existing franchise agreement with Hilton. The franchise agreement extends until 2026, according to real estate services company CoStar.
Other high-priced offerings in San Diego include the 210-room Estancia La Jolla, which sold for $108 million, or $514,000 per room. The Pantai in La Jolla – a 30-bedroom property – was acquired for $733,000 per room.
Outside of La Jolla, the 350-room Hilton San Diego in Mission Valley was bought for $66 million, or $189,000 per room. The downtown Hotel Indigo cost $78 million, or $371,400 per room.
At the height of the pandemic, “there was a huge amount of money raised by private equity groups in anticipation of many hotel foreclosures,” Reay said. “That obviously didn’t materialize. So they’re sitting on hundreds of millions, if not billions, of capital that needs to be placed, and we’re seeing that come to market.
This new breed of buyers increasingly values individual hotel properties the way Wall Street values publicly traded hotel companies, said Bob Rauch, chief executive of RAR Hospitality and owner of three hotels in San Diego County.
Instead of looking at the past 12 months of revenue and net operating income to determine a hotel’s value, buyers today are increasingly projecting those metrics into the future, Rauch said. .
“That’s what Wall Street is doing, and individual hotels start being priced that way if they’re really good assets,” he said. “So they’re priced on the fact that the next three years should be exceptionally strong – in the sense of 2005-2007 in terms of year-over-year percentage growth.”
An expected rise in interest rates later this year, however, could cool current price increases, Reay said.
“I think you’re going to see (high transactions at high prices) continue in the first six months of 2022,” he said. “We expect the second half of this year to see trading slow, and then when you factor in the interest rate adjustment, you’re likely to see price stabilization or even a slight decline.”