Hospitality: Survey Reports Average Price Per Room Drops 42 Percent
Considering that in 1998, REITs were more active in the hotel market and a number of pricey hotel sales took place in San Diego, a big drop in the region’s average price per room in 1999 was no surprise, according to a Costa Mesa-based hospitality firm.
Atlas Hospitality’s 1999 Year-End Hotel Sales survey reports a 42 percent drop in the average price per room, said company president Alan Reay.
Reay attributes it in part to Alex and Debra Szekely’s sale last year of the 39-room Golden Door Spa in Escondido to Dallas-based hotel REIT Patriot American for $28 million. It led to a price per room of $717,000, he said.
“Averages can be skewed by one mammoth deal,” he said.
Rick Mansur, president of the San Diego Hotel-Motel Association, agreed about the average price per room between ’98 and ’99. “I don’t think you’ll see those kind of significant drops, so I think that was a bit of an aberration,” said Mansur, who is general manager of the Rancho Bernardo Inn. “The market is soft, no doubt about it.”
According to Reay, a better indication of the market is the median price, which at $35,417 was up for San Diego County 9 percent in 1999 over 1998’s $32,432.
In 1997, it has been $33,536, and and in 1996 it was $33,462, up from $19,221 in 1995, the report said.
This year, the largest hotel transaction was the Hyatt Regency La Jolla, which was part of the Aventine Complex deal. Reay estimates the value of the hotel at $84 million, based on the $140 million deal for the total complex.
In general, sales transactions, which numbered 40, were up “quite a bit” from 1998, when there were 32, Reay said. There had been 30 in 1995, 32 in 1996, and 34 in 1997, according to his report.
Vibrant Economy Helps
“Buyer demand is tremendous, and it’s because of the economy,” he said. “The hotel economy in San Diego is very, very, strong as it relates to other parts of California.”
It’s been particularly good news for some, Reay said. “A number of clients who have purchased back in ’95 and ’96, during the foreclosed hotel stages, are now realizing some very healthy hotel profits and are deciding to sell.”
For the rest of 2000, Reay said he expects an increase in room prices, but said that larger-sized properties are not going to sell at some of the prices they had in the past two years.
“The hotel real estate investment trusts have basically pulled out of the market, so they’re not buying anymore, and interest rates have jumped by about 150-200 basis points,” Reay said. “That tends to affect the higher priced properties,” he said. The properties, worth $5 million and more, tend to be operated by private hotel companies, he said.
It has had a dampening effect on the more expensive transactions, he said, “There’s just not a great buyer pool out there for those properties,” Reay said.
“I think you’re going to see fewer hotels trade at that level,” he said. “If they do, they’re going to have to be very realistic about pricing.”
Hotel properties worth less than $5 million are often operated by their owners and are a little less susceptible to interest rate hikes, he said.
The volume of transactions in 2000 will stay at 1999’s level or be slightly higher, Reay said. “We’ll still see a lot of turnover of product, you just won’t see as much trading over in the larger-size properties.”
The average price per room took a “huge” hit in 1998, and because of it, Reay predicts 2000 will see some rebound. Along with the median price per room, it will increase 10 percent.
“Business is looking strong,” he said. In fact, most hotel owners have been raising their daily room rates, he said. “They’ve had some really good, healthy jumps in their rate, and they’ll push right until it really, really starts to impact the occupancy, and then they’ll adjust it.”
Mansur agrees. Occupancy has flattened out, so if hotels want to raise their revenue-per available-room, the only other way to do it is with rates, he said.
“That’s always a dicey proposition,” he said. “If you move your rates up too aggressively, you’ll have an offset in your occupancy and your rev-par will remain flat, so there is some risk in it. But I think there is still some room for modest growth on the rate side.”
According to Reay, the only “cloud on the horizon” for San Diego was that the county has more new product coming online than many other areas of California, especially Southern California.
“All of the signals down in San Diego County are so positive,” he said. “As negative as it was in ’93 and ’94 in the recession, almost across the board , every sign in terms of new companies moving in, tourism, convention center , every factor down in San Diego County is positive. It’s a good place to be.”
According to Mansur, the most important impetus to better rates and get growth to completing the convention center expansion and opening the third convention headquarter hotel.
“It’ll bring more high-end meetings, and larger meetings to the San Diego area,” he said. “That’s, in my mind, the key.”