Hotel Sales Plunge as Economic Woes Take Toll

"We are seeing that some areas in California are experiencing very large declines in value, while others show much stronger resilience, and values are holding up quite well and even increasing," comments Alan X. Reay, president of Atlas. He mentiones Los Angeles and Orange counties specifically.

"It appears that the fallout from the subprime market that has had such a devastating effect on home prices in California is now beginning to impact the commercial property market," Reay says. His report says that one of the first signs of this trouble in the hotel sector is the number of notices of default filed by lenders, which jumped substantially in the second quarter of 2008.

"Hotels that are at the greatest risk are those that were highly leveraged and located in secondary and tertiary markets, where the impact from the run up in gasoline prices has been felt the hardest," the Atlas survey states. It sees the next 12 months as "very challenging for both hotel owners and their lenders," who are operating in an environment that is "a completely different market" from 2007.

Owners who want to sell in today's market "are going to have to be much more realistic in pricing and will have to forget about what they could have sold for in 2007," Reay says. He explains that buyers are only interested in acquiring hotels with proven performance that will give them strong cash flow returns—in many cases this means increased cap rates and lower prices.

Los Angeles County was one of the places where dollar volume of sales actually increased, rising 54% to nearly $681 million in the first half of the year, although individual transactions dropped 19% to 22 deals. Also on the up side, the county's median price per room increased 47% to $123,529. Los Angeles County had the largest hotel sale in California, by room count and price, with the $367 million sale of the 726-room Hyatt Regency Century City, also known as the Century Plaza.

In Orange County, sales decreased 36% to seven deals with dollar volume down 81% to $48.3 million through the first half of 2008. However, the county's median price per room rose 16% to $108,259. Transactions in San Diego County increased 22% to 11 deals with total dollar volume going up 187% to nearly $94 million. The median price per room increased 9% to $89,737.

With so many fewer sales in the first half of 2008, Atlas says that it is difficult to discern a strong trend from its recent survey. "We will be in a better position to make a forecast at the end of the year, but it appears that the continued price appreciation that we had seen in California over the last five years may be coming to an end in some markets," the report concludes.