Silicon Valley Business Journal
Don’t Let the Numbers Fool You — Silicon Valley Is a Hot Hospitality Market
By Janice Bitters
When it comes to U.S. hotel sales, California — and particularly the Bay Area — generates the most money per transaction and per hotel room in America, but year over year, 2017 wasn’t its best year, according to new data released by Atlas Hospitality Group.
In Santa Clara County, for instance, Irvine-based Atlas tracked 12 hotel sales in both 2016 and 2017, but noted the total dollar volume for sales in the county was down 23 percent last year while the average price per room dropped about 32 percent. The median price per room sank 27 percent last year.
San Mateo County, meanwhile, saw about five hotel sales both years, but smaller, single-digit dips for overall dollar volume, which was down 4 percent, and average price per room, which decreased 5 percent.
But Alan Reay, president at Atlas Hospitality Group, warns that the dips don’t paint a gloomy picture. When tracking so few sales in each county, averages may not tell the full story, he said.
“I don’t think anyone we would talk to would think that the Bay Area is declining in value,” he said. “It probably is that some years you have larger, trophy-sized hotels and more hotels at that higher price category… but the Bay Area, San Jose, Silicon Valley is probably the No. 1 area that we get for buyers looking for deals.”
Indeed, Santa Clara County hotels last year fetched some of the highest prices per room in Silicon Valley and the East Bay. However, those prices didn’t beat out San Francisco, which has traditionally been the most expensive market in the Bay Area, according to Atlas data from the past decade.
The most expensive Silicon Valley sale of the year was the 353-room Hilton Hotel in downtown San Jose, which Chinese real estate company Han’s Holding Group Co. bought in April for $87.3 million. That deal shook out to more than $246,000 per room.
Though the Hilton brought in the highest dollar amount for a single sale in Santa Clara County, Atlas data notes that a 136-room Sunnyvale property, the Domain Hotel, sold last year to The Ascott Limited for about $441,740 per room — nearly $200,000 more per room than sales in Alameda, San Mateo and Sacramento counties.
Dharmesh Patel, an executive managing director for Colliers International who specializes In the Silicon Valley hotel market, says the South Bay is becoming one of the most attractive markets in the Bay Area for investors looking to plant their money in hospitality.
“I’m seeing a lot of hotel companies who are based in other parts of the country, … who are looking to enter the San Francisco Bay Area and even more specifically the Silicon Valley market,” Patel said. “I’ve got at least four or five companies right now that we are working on potential development deals that would be, if not their first, then one of their first hotels in Silicon Valley.”
Silicon Valley hotel development ramps up
Looking ahead, both Reay and Patel estimate a steady 2018 for the hospitality market in Silicon Valley, despite rising labor costs, capital partners that are becoming increasingly choosy and the projected rise of interest rates.
Part of what has kept hotel prices high in Silicon Valley is the growing tech companies, which help significantly to fill up existing rooms during the week with business travelers. As those companies continue to grow throughout the Valley, demand for hotel rooms will only increase, Patel and Reay agree.
The Silicon Valley Market is responding to that demand. In Santa Clara County, for instance, four hotels with nearly 580 rooms opened in 2017, Atlas data shows. The largest of those was the 210-room AC Hotel by Marriott in downtown San Jose.
But another 10 hotels are under construction, and those would add more than 1,440 rooms to the market. Meanwhile, 56 hotels that could add about 9,453 are currently in the planning phase throughout the county.
Patel and Reay say even if all those hotels in the pipeline came to fruition, it wouldn’t likely dampen demand, room rates or sale prices in Silicon Valley.
“I think there’s been such a shortage in the Bay Area for such a long time, we are only now starting to catch up with all the supply that wasn’t added in the last 10 years,” Reay said. “What I see under construction, I think can easily be absorbed.”
One thing the new construction could do, however, is prompt more sales in the coming years, Patel estimated in an interview Friday.
“I think holders of some of the older assets are going to start looking at the pipeline of new assets coming online and say, ‘hey, it might not be a bad time to take some chips off the table, especially on some of our older assets as newer stuff is going to come on board,’” he said.