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IRVINE, CA-The number and dollar volume of hotel sales in California slowed in the first half of this year, according to a new report by Atlas Hospitality Group, which foresees a continued slowing as the impact of the capital markets turmoil takes effect. The number of sales dipped by nearly 8% to 177, and the dollar volume of sales dropped by more than 33% to just under $2.1 billion.

Alan X. Reay, president of Atlas, tells GlobeSt.com that the slowing in the first half of this year was not connected to the recent upheaval in the credit markets but had to do with other factors. Reay explains that there were two primary reasons that the sales slowed during the first six months of this year.

First, the state’s hotel market was coming off a record sales year of $5.1 billion worth of transactions in 2006 that would have been hard to match in any case. Second, the year 2006 was marked by an atypically high number of large portfolio deals, a phenomenon that is not likely to repeat itself because most of the portfolio deals that were out in the marketplace have now closed.

The Atlas outlook for California hotel sales for the rest of the year, Reay says, is that “we expect the market to slow down even more in the second half because of the tightening of the credit markets.” The Atlas president says that the crunch, however, will impact larger deals more than smaller transactions.

“The smaller deals are still pretty active and pretty much untouched by the credit crunch, but the bigger deals of $20 million and larger, and the portfolio sales are definitely being impacted,” Reay tells GlobeSt.com. He explains that one of the chief differences in the impact of the credit crunch on smaller versus larger deals has to do with the different sources of financing and the different expectations that typify the two classes of buyers.

Buyers of smaller deals typically depend on SBA financing, whereas buyers of larger deals typically rely on conduit loans and other sources. “SBA financing is tied to prime, and prime has actually adjusted down a quarter of a point,” Reay points out.

The capital markets shift has not yet affected hotel construction because the tightening of the credit markets has occurred primarily in the realm of conduit loans, and conduit lenders do not lend for new construction, Reay says, explaining that developers rely on local lenders for construction financing. But conduit financing is important as a source of take-out loans for construction financing, Reay adds, so the conduit loan crunch could have an impact in that regard.

The Atlas hotel sales report for the first half of the year shows that in its home base of Orange County, the number of sales decreased by 35% to 11 and total dollar volume was down 56% to $251.3 million. Orange County chalked up the single largest and most expensive sale in Southern California with the 1,572-room Hilton in Anaheim trading for $160 million.

In Los Angeles County, the total number of sales declined by 43% to 27 from the first half of 2006, and total dollar volume dropped 22% to $441.6 million. The Inland Empire bucked the trend somewhat, with the number of sales rising by 6% to 19 in Riverside County and dollar volume soaring 175% to $141.9 million, while the number of sales in San Bernardino County remained unchanged, and the dollar volume rose 9% to $37.7 million.

Despite the decline in the total number of individual sales transactions and dollar volume, the median price per room was up 16% in Southern California to nearly $101,000 and up 33% to more than $91,000 in Northern California. “On a positive note, we see the median price per room throughout California continuing to move up,” Reay says.

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