This year, hotel sales experienced a steep decline statewide, according to Atlas Hospitality Group, which recently released its midyear 2023 California sales report.
“It’s a record number decline,” said Alan Reay, president of Atlas Hospitality Group, who’s been tracking California hotel sales for more than 20 years. “We’ve never seen this kind of percentage drop.”
Statewide, sales decreased 53% during the first half of the year.
Reay said he sees numerous similarities between now and 2009.
But, what’s even more interesting about this year’s dramatic decline in sales is that it doesn’t necessarily square with how hotels are doing, a marked contrast with 2009, when the U.S. was coming out of the Great Recession.
Most hotels – specifically in Southern California – have recovered from all the residual impacts of Covid-19 in terms of an operational standpoint, with revenue and occupancy rates having generally returned to pre-pandemic levels.
“The big cause of this decline is the rapid increase in interest rates,” Reay said. “The one word that would sum it up is ‘disconnect.’”
Reay said the disconnect exists between the expectations of buyers and sellers – the prices that sellers are looking for are just not comparable with the cost buyers must pay for loans.
This has resulted in an uptick in the notice of default filings and foreclosures, as well as borrowers simply handing keys back to their lenders.
“I would call this an interest rate-driven downturn,” Reay said, noting that despite numerous similarities to 2009, we are not in a recession now because the operational side of the hotel industry is performing relatively well.
Los Angeles hotel sales
In Los Angeles County, only 17 hotels were sold in the first six months of the year compared to 36 in the same period last year. That’s a decline of 53%, the same percentage drop as the state.
Likewise, of those transactions, the number of rooms that sold last year was 2,894, as opposed to the 1,315 in the first six months of this year, a 55% decrease. Also, the median price per room declined by 13% this year.
Yet, last year the total sales price was $808,259,906, whereas this year the total sales price was $1,008,790,000, a 25% increase.
In addition, the average price per room this year is up 16% year over year, further illustrating the disconnect between the expectations of buyers and sellers.
And beyond high interest rates, Measure ULA – the one-time real estate transfer tax unique to L.A. city properties valued at or above $5 million that went into effect on April 1 – has hit the L.A. hotel scene hard, with many owners delaying selling.
In the second quarter of last year, L.A. experienced 20 hotel sales priced above $5 million. In that same period this year, the only hotel sale the city of L.A. had above $5 million was the $760 million foreclosure sale of the Fairmont Century Plaza, a 394-room luxury hotel located in Century City, by the Reuben Brothers.
“What you have unique to Los Angeles is not only this huge decline in sales because of interest rates,” Reay said. “It’s compounded by the fact that you now have the mansion tax and owners are really holding off on selling.”
According to Reay, as long as interest rates remain at their current levels there will be more pressure on sellers and lenders to adjust their price expectations downward.
