A Welcome Sign for the Bay Area Hotel Industry in 2018

The Registry
06/25/18

A Welcome Sign for the Bay Area Hotel Industry in 2018
A robust 2017 for Bay Area hotels could bring continued expansion in 2018, say two industry reports
By Michele Chandler

http://news.theregistrysf.com/a-welcome-sign-for-the-bay-area-hotel-industry-in-2018

Hotel development is going strong in California, with the industry setting a new record for hotel room openings in 2017. Early indications are that 2018 is shaping up to be another breakout year, even as potential economic clouds gather on the horizon, according to two newly-released industry reports.

The Atlas Hospitality Overview and Outlook report, released in the first half of 2018, found that a total of 10,793 rooms came online in California during the year, surpassing the previous high of 10,286 rooms achieved in 2008. In total, the state saw 66 hotels open, with a combined 10,793 rooms.

Atlas’ 2017 Year-End California Hotel Sales Survey, released Feb. 8, reported that California’s hotels attained a new statewide record on median price per room of $106,496, while individual hotel sales rose 14.6 percent over 2016.

In Northern California, 21 hotels opened last year, Atlas found, up from 13 in 2016. Those hotels represented 2,726 rooms, up from 1,399 rooms the prior year.

The report said that 63 hotels were under construction across Northern California, up from 36 in 2016. That represents 7,605 rooms, a 77 percent rise.

Atlas said another 350 hotels were in the planning stages in Northern California, up 28 percent. They represent 46,382 hotel rooms, a 26 percent rise over 2016.

Mid-market hotel companies were the most active, including popular residence and suite hotels, said Alan Reay, president of the Atlas Hospitality Group, which released its report in early 2018. Marriott was number one in new development in the state last year, Reay said, followed by Hilton, Hyatt and InterContinental Hotels Group PLC’s Holiday Inn.

“Lenders love the brands, so financing is definitely readily available for those kinds of properties, as opposed to full-service resort hotels,” said Reay, adding that resort hotels remain “somewhat more difficult to get financed and built.”

In all, California had 145 hotels with 20,693 rooms under construction, and a 17 percent room increase, the report said. The state counted 859 hotels with 125,749 reported rooms in various stages of planning last year, a 23 percent room count increase.

A host of new hotels are expected to open in the Bay Area.

In Santa Clara County, 10 more hotels are being built, including the 200‐room Aloft in Mountain View.

In San Francisco County, four hotels totaling 670 rooms were under construction at the end of the year. The largest is the 230‐room Hyatt Place.

Napa County has four hotels with 338 rooms under construction. The biggest is the 145‐room Meritage Commons in Napa.

And Sonoma County has seven hotels with 691 rooms under construction. The most significant is a 135‐room Cambria Inn & Suites in Rohnert Park.

Several factors helped make 2017 a record‐breaking year for California hotel development, the report said, including the availability of construction and long‐term financing at low interest rates.

With recent talk about rising interest rates, however, Reay cautioned, “That is a cloud that could have a dampening effect on resale values and, consequently, a dampening effect on new development.”

Another wild card for hotel profitability is the state’s latest increase in the minimum wage, which rose on Jan. 1st, 2018 under a law that went into effect last year.

“We are seeing expenses on hotels go up. They’ve been able to weather that storm by the fact that revenues have outpaced their increasing expenses. But, as we get new supply coming in, there’s only so much business to go around, and we may see a flattening out of revenues,” Reay said.

Finding hotel workers is also a potential headache. “The flip side of having a good economy is that the labor pool has become much tighter. We’re hearing from a lot of clients that it is very difficult to hire, and it is even more difficult to retain [employees], because people go on to another hotel for a few extra cents per hour,” said Reay.

Added expenses for some hotels in Southern California include charges applied to new commercial and residential development projects in downtown Los Angeles to fund low-income housing, Reay noted.

While positive economic factors should keep hotel values and sales going strong in 2018, Atlas’ newest report said, several “potential issues” lie ahead for hotel buyers and sellers. Rising labor costs and expected interest rate increases could impact hotel sales in 2018, the Hotel Sales Survey said. The rising number of new hotels and higher costs of property improvement plans for franchise establishments could also emerge as issues for the industry, according to the report.

Bright spots for the state’s industry include individual investors from overseas, especially from China through the EB‐5 Immigrant Investor Program, which have helped buoy the state’s hotel industry in recent years, the report said.

Even with the addition of so many new hotels, Atlas’ research says, “we see sustained growth for the foreseeable future. This is due to the strong levels of occupancy and profit margins, combined with an extremely positive economic outlook—stock market and home value growth.”

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