SAN FRANCISCO—The densely developed downtown market includes nearly 50 million square feet of rentable office space and has limited developable land, hence, high barriers to entry. As of October 2016, San Francisco's year-to-date hotel RevPAR was up 4.3%, significantly above the national average of 3.2%.

Within the hospitality inventory is the Ritz-Carlton, an iconic 336-room hotel located at 600 Stockton St. in Nob Hill. Its acquisition by lodging REIT, Carey Watermark Investors 2 Incorporated, is the second Ritz-Carlton Carey Watermark has acquired (the first was in Key Biscayne, FL).

The price was undisclosed but GlobeSt.com learns that a prior sale by Thayer Lodging Group occurred in 2013 for an acquisition price of $161 million. This follows on the heels of the announced sale last month of the St. Regis hotel for approximately $175 million by Marriott International Inc. to Qatar Investment Authority, GlobeSt.com learns. This was the last luxury hotel to open in San Francisco, more than a decade ago. The 260-room hotel offers 15,000 square feet of meeting space and will undergo a renovation of the guestrooms and public areas.

Another large hotel transaction of 2016 was the $197 million sale of the mixed-use Vintage Estate in Napa County, which includes the 80-room Vintage Inn and the 112-room Villagio Inn and Spa. As previously reported, Carey Watermark Investors acquired the recently renovated 510-room San Jose Marriott in summer 2016 for $154 million. This is in contrast to the sale of Parc 55 San Francisco back in 2014, for an estimated $550 million.

While this may indicate that prices are softening, nothing can take away from the strength of the tourist market here, and the iconic nature of some of these irreplaceable assets, such as the Ritz-Carlton. The 18-column, nine-story building was originally developed in 1909 and designed by Napoleon Le Brun & Sons of New York. In 1984, the neo-classical treasure received landmark status from the city and after an extensive four-year renovation, re-opened in 1991 as the Ritz-Carlton San Francisco.

More than $20 million of capital improvements have been completed since 2014, including the renovation of all guest rooms and 23,000 square feet of meeting space, including a 9,400-square-foot ballroom and 2,200 square feet of interior courtyard and function space, lobby, restaurant, wine tasting lounge, jewelry boutiques and L'Occitane spa. A fitness center was also added during the renovation. The hotel continues to serve as San Francisco's only AAA Five-Diamond Hotel and received several industry awards last year such as Michelin Travel Guide Five Pavilions, Best in Hotel in San Francisco by Zagat, Forbes Four Star Rating, number one hotel in San Francisco by Travel + Leisure, GlobeSt.com learns.

The Ritz-Carlton is situated along the California Street cable car line, with access to the Financial District, Union Square and Fisherman's Wharf. The property is less than one mile from Moscone Center, which is undergoing an approximately $500 million renovation and expansion that is expected to be completed in late 2018.

“As the highest-rated luxury property in a globally recognized destination, the acquisition of the Ritz-Carlton San Francisco is a significant addition to the CWI 2 portfolio,” says Michael Medzigian, chief executive officer of Carey Watermark Investors 2 Incorporated. “In combination with the strength of The Ritz-Carlton brand, the hotel represents a unique and attractive opportunity as we continue to build out our portfolio. San Francisco's consistently rising property values, limited land availability for hotel development and high cost of construction will support the long-term value of the asset. We believe the expansion of Moscone Center, as well as our ability to implement value-add enhancements, will increase profitability and reinforce the property's already enviable competitive position within the luxury sector of the market.”

The hotel will continue to be managed by The Ritz-Carlton Company LLC, an affiliate of Marriott International. As part of The Ritz-Carlton portfolio, the hotel benefits from Marriott's management platform, including access to The Ritz-Carlton global distribution system and The Ritz-Carlton Rewards program.

Paul Hastings represented Carey Watermark Investors 2. The Paul Hastings team was led by real estate partners Rick Kirkbride and Derek Roth, with associates Myles Blau and Erica von Pechmann.

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