DEL MAR, California—Hotel markets in southern and coastal California are hopping and as buyers who have been sitting on the sidelines begin to jump back in, the window of opportunity on attractive deals is starting to close, according to a panel of experts last week.
“We’re in the second inning of the recovery,” said Gary London, a San Diego real-estate economist and president of The London Group Realty Advisors. “We have a long way to go,” but the worst appears to be over, London said, pointing to strong gains in occupancy, revenue and transaction pricing in California’s coastal markets in 2011. Lenders remain cautious, however, making this primarily a cash market.
London and three other hotel real-estate experts offered forecasts and advice to an audience of investors and hotel operators from around the San Diego region at a panel called “Let the Good Times Begin.” Robert Rauch, president of R.A. Rauch & Associates, a San Diego-based hospitality management company, hosted and moderated the event in Del Mar.
Looking forward
In Los Angeles and San Francisco last year, both pricing and revenue per available room were back at 2007 and 2008 peaks, said Alan Reay, president of Atlas Hospitality Group, which provides industry analysis. San Diego hasn’t fully recovered but still saw growth.
This year, hoteliers should expect to see sustained RevPAR growth again—at least 7% in coastal markets, Rauch said.
But is this fresh exuberance properly anchored in facts or another flight of fancy? “There seems to be general optimism. It’s empirical. It’s not thought, it’s not feelings, it is just pure black and white numbers,” said Ash Patel, president and COO of Premier Commercial Bank, based in Anaheim.
The panelists offered data to back him up:
• Competition is down by 20% to 30%, due to brand consolidation and limited new construction, Patel said.
• Defaults are down, either because banks were willing to delay foreclosing or because hotels are doing better. “We were forecasting a huge wave of foreclosures that simply didn’t materialize,” Reay said.
• Business travel is up, and trickling up-market, as corporate policies against high-end accommodations start to relax.
• Real-time online booking is letting operators make better pricing decisions and respond more effectively to the ebb and flow in traffic, the panelists said.
Overall, the industry is better equipped to respond to turbulence and take on or pay down debt.
Buyers were evidently compelled by these metrics. There were more than 300 hotel transactions in California last year, up from 80 in 2009, Reay said. “We’re back to what we consider normal transaction years,” he said.
Three of the four top markets for hotel real-estate transactions were in California. San Diego was most active, coming second after New York. Secondary markets, including inland California and Scottsdale, Arizona, are experiencing a delayed recovery because many of their properties still are distressed.
“In ‘A’ markets, you’re not going to see much in the way of distressed debt right now. Maybe the best investment opportunities are in ‘B’ and ‘C’ markets right now,” Reay said.
Jumping in
What should investors do to get in on these deals? The panelists offered several strategies and caveats.
•Think new. For people looking three to five years out, now is the time to look for development opportunities. Though lenders may not be interested in new properties, London anticipates there will be a need for greater supply. “Planning for that, with the purchase of properties, repositioning, rebuilding, needs to start right now,” London said.
•Forget luxury. That sector had the largest RevPAR growth in Southern California last year, and the same increase this year “will be very difficult,” said real-estate lawyer Guy Maisnik, hotel attorney with California-based Jeffer Mangels Butler & Mitchell.
•Take note. For underwater properties, 2006 and 2007 ARM notes are coming due. Maisnik expects more asset sales and more note sales this year. Investors should remember they’re buying the debt, not the property.
Most importantly, developers should not get their hopes up for bank financing. Even though banks are sitting on enormous reserves, the market currently is driven by cash sales because lenders remain skittish after being burned by overexposure or valuations that weren’t in line with reality.
As a result, “there’s a tremendous amount of capital sitting on the sidelines. A lot of people are willing to write a check, and that’s how these deals are done,” Reay noted.
What is getting funded? Refinance and remodel projects have the best chance, but only for primary- and secondary-market properties. Tertiary-market properties and new developments still are deemed too risky.
All in all, it’s “a good time to be in the hotel business,” Reay said.