The hotel deals pace picked up in California during the second half of 2025, driven in large part by distressed sales.
The California Hotel Sales Survey 2025 Year End from Atlas Hospitality Group reported 259 individual hotel sales, a 4.4% year-over-year increase. Total dollar volume amounted to nearly $4.1 billion, a 22% year-over-year increase, but the median price per room fell by 7.2% to $138,000. The company’s mid-year survey reported a 7.4% year-over-year drop in individual sales.
Distress was a significant factor in the increased number of deals this year, Atlas President Alan Reay said. For example, the Parc 55 and Hilton Union Square hotels in San Francisco sold at a deep discount to their prior valuations. Many lenders were likely trying to get some of the stressed properties off their balance sheets before the end of the year, leading to higher transaction and dollar volumes.
Along with the San Francisco properties, there are motivated sellers, such as Ashford Hospitality Trust and other publicly traded hotel real estate investment trusts, that were able to sell at “market pricing,” he said. The state may actually have a record number of hotels available for sale.
“The issue there is, you have quite a lot of motivated sellers, they're restricted as to how far they can go down on that price due to the fact that they have the loans that they have on there,” he said.
There are multiple factors at play pushing owners to sell, Reay said. Net operating income is essentially down across the board while expenses are up. Those low-interest-rate loans that owners enjoyed years ago are coming due, and the cost of debt service now is roughly double what they secured before.
Even though the Federal Reserve has lowered interest rates, the cost of debt for hotel owners was below 4% before rising to about 8%, and it has since settled in the low 6% range, he said. Added to that is the fact that appraised values are now lower than they were two to three years ago.
“So, in many cases you have a loan coming due, you have to actually come out of pocket to pay down the financing to refinance,” he said.
There’s a definite uptick in the number of notices of default filed on hotels, Reay said. Most banks delayed as much as they could, but they could only hold back so long. For the first half of 2026, he said he expects to see more lender-related sales, and that will affect the median price per room.
Many of these defaults come from independent hotels and those in the lower end of the chain scale, he said. Many of those loans originated with the U.S. Small Business Administration, which allowed some borrowers to take out debt with as little as 10% for a down payment. With the labor cost associated with running a smaller hotel that charges less per night than a higher-end hotel, that makes it difficult for these hotels to operate confidently.
From a buyer’s perspective, the transaction volume this year compared to last year is a reflection of at what price point sellers were willing to sell, Reay said.
“I think it’s now less an issue with interest rates and financing as more to we’re now seeing in some markets sort of a reset in terms of the pricing,” he said.
California’s hotel-to-housing funding program, Homekey, remains active but less so than in recent years, he said. The private-sector buyers, however, continue to show interest in buying hotels to convert to affordable housing. There are still rooms in this sector to be converted as owners of these hotel types continue to be under pressure from expenses.
The biggest expense for hotels is labor, but if an owner can convert a hotel to apartments, they move from all the operating costs associated with running a hotel to almost nothing, he said. There’s no housekeeping service, no credit card commissions and no online travel agency or franchise fees. There’s perhaps an on-site manager and maybe a part-time maintenance employee.
Given the cost of available land and construction for a new apartment, converting hotels looks much more palatable, he said. A hotel that costs $100,000 per key to buy with a conversion cost of $30,000 to $50,000 per unit is well below the cost of paying $400,000 per unit to build.