Some experts are predicting that 2020 will go down as the worst year on record for the hotel real estate market
The dollar volume of San Diego County hotel sales plummeted by 70 percent during the first half of this year, yet another indicator of an industry facing huge financial challenges amid a pandemic that has already forced some properties to default on their loans.
In a recently released report by Atlas Hospitality Group, a Southern California brokerage firm specializing in the lodging industry, counties up and down the state saw a major slowdown in lodging properties changing hands, with the dollar volume of sales statewide down by more than 53 percent during the first six months of this year.
Even more telling are the numbers documenting the abrupt slowdown in transactions since the mid-March shutdown order from Gov. Gavin Newsom. Between April and June, there was just one hotel in San Diego County that changed hands, compared with five a year earlier, which translated to a 97 percent plunge in the dollar volume of the sales, Atlas reported.
Statewide, the dollar volume of hotel sales during that same period fell 82 percent. Some 32 hotels representing 1,539 rooms sold between April and June of this year in contrast to the 58 properties accounting for 4,585 rooms that sold a year earlier.
Given the continued economic toll COVID-19 is taking on hotel industry performance as far fewer people are traveling, Atlas is predicting that 2020 will go down as the worst year on record for hotel sales, with a return to normalcy still several years off. Much of the financial distress Atlas President Alan Reay is seeing in the hotel real estate market is reminiscent of the Great Recession, he says.
“The reason we’re not seeing a lot of transactions now is the disconnect between buyers’ and sellers’ expectations,” said Reay. “Sellers are not willing to sell at the prices buyers are willing to pay today. We saw this happen in 2009 when sellers were riding the crest of a wave of very high values in 2007 and 2008, and as buyers perceived the market to be crashing, they altered their expectations, but sellers still expected to get 2007 and 2008 prices.
“So what really has to happen is that they have to get rid of COVID through a vaccination and we’ve got to see people traveling again and in San Diego that means meetings and conventions coming back but that’s not going to happen for a while.”
Less than a week ago, the tourism industry reported that the pandemic has so far cost local businesses more than $3 billion in visitor spending and that hotel revenues are down 60 percent this year.
The longer the pandemic lasts the greater likelihood that the hotel industry could be seeing a wave of foreclosures as hotels struggle to make loan payments with little revenue coming in. Nationally, hotel industry leaders have been calling on Congress to pass legislation that would provide a financial lifeline to the commercial real estate industry. That effort intensified last month when a new report came out showing that 23.4 percent of hotel loans were delinquent by at least 30 days as of July 2020. That compares to the 1.34 percent of loans delinquent by 30 days or more at the end of 2019.
In San Diego County, there are just a few hotels that are currently behind on payments, anywhere from 30 to 90 days, said Reay. Among those properties showing delinquencies are the 176-room Courtyard Marriott Old Town, the 126-room Fairfield Old Town, and 207-room Four Points SeaWorld.
Among the hotels that did sell so far this year are the 183-room Hotel Palomar in downtown San Diego and the 114-room Bristol Hotel, also downtown. The Empress Hotel in La Jolla commanded the highest price per room — at more than $300,000.
Maryland-based Pebblebook Hotel Trust, whose portfolio includes seven hotels in San Diego County, is well-positioned to ride out the pandemic, given its $600 million in cash reserves, but it’s the smaller operators who will have a hard time keeping their loan payments current, said Pebblebrook Chief Financial Officer Raymond Martz.
“I just completed calls with 16 of our banks over the last week, and I asked, ‘Are you lending to the hotel space?’ and not a single lender said yes,” said Martz. “And our lenders are Bank of America, Wells Fargo, Bank of Montreal, Japanese and Taiwanese banks. Everything is on hold right now. Everyone is looking at when is the vaccine coming.
“So the people out looking to buy they’re looking at 40, 50 percent discounts, and if you’re selling right now, you’re selling for survival, not dissimilar from what we saw in 2009 and 2010.”
Among the properties it owns in San Diego County are such well-known hotels as Paradise Point on Mission Bay, the Doubletree and Solamar in downtown San Diego, and L’Auberge Del Mar.
Of its properties in California, those in San Diego are the best positioned to succeed, Martz believes, because of the region’s appeal as a resort destination. Still, he worries about the coming fall and winter months and the lingering effects of the pandemic next year.
“Yes, this year is shaping up to be one of the worst years ever, and 2021 may give 2020 a run for its money because this isn’t going to end anytime soon,” Martz said. “As you get into the winter when it’s a slower travel demand, it’s going to make things even more challenging. This is going to end badly for a lot of people, with some hotels handing back the keys to the lenders. But we survived 9/11, we survived the collapse of Lehman Brothers. We’ll get through it.”