The historic 62-room boutique hotel is one of only three hotels located along the Embarcadero. It offers views of the Bay Bridge, Yerba Buena and Treasure Island. It also sits near the recently restored Ferry Building, a major tourist attraction filled with restaurants, cafes and a gourmet food court and shops.

The offering was packaged, marketed and sold in three months by Buchanan Street Partners. Buchanan Street SVP Curtis Davies tells GlobeSt.com that the sale price translates to a cap rate of around 5. Given rising interest rates, that is likely as low as cap rates will get for the time being.

Several major hotel properties that are on the market, recently sold or under contract as investors bet on a recovering San Francisco hotel market, says Davies. The nearby 110-room Campton Place hotel sold in November for $400,000 per key. The Argent hotel on Third Street between market and mission was sold in late March for $178 million or $258 per key. It may be converted to a Westin, according to local sources.

Earlier this month, publicly held Strategic Hotels & Resorts Inc. of Chicago signed an agreement to acquire the historic Westin St. Francis hotel on Union Square for $440 million. The 1,195-room historic property fronting Union Square is being sold by an affiliate of the New York-based investment bank Blackstone Group that acquired the hotel in 2000 for $243 million. The sale is expected to close during the second quarter 2006.

The Four Seasons was recapitalized in a deal that valued it at $124 million or $450,000 per unit. Millennium Partners took out one of its capital partners and replaced it with another. The Park Hyatt is under contract and may become a Le Meridian, a brand recently acquired by Starwood. As well, the Pan Pacific Hotel is under contract to a buyer that wants to convert it to a JW Marriott and the Palace Hotel is on the market.

"Occupancy is healthy and rates are climbing, so they are basically buying into the future," Davies says. "If you look back to the peak of the market, 1999-2000, our rates and occupancy were pretty close to that of New York City and now there is quite a disparity."

Indeed, NYC had an average rate of more than $200 at 81.4% occupancy in 2005 while San Francisco's rate was closer to $128 at 71.8% occupancy, according to PKF Consulting. "If you believe it's only a matter of time before they are again more closely aligned, then it makes sense to invest in this market," Davies says.