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Hotel Recovery Appears to Have Staying Power

If current patterns hold, industry observers expect San Diego County hotels to continue riding a wave of positive growth trends into 2013, with the region on track for a return to pre-recession peak revenue numbers last seen in 2007.

However, while investor interest is rising, many current hotel owners aren’t yet ready to part with properties that recently have been on a performance hot streak.

“In the last 36 months, hotel property values are up 40 to 60 percent,” said Alan Reay, president of research and brokerage firm Atlas Hospitality Group, referring to a steady national recovery since the industry’s low point of 2009.

“Right now, however, there are still more buyers than sellers.”

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Reay said the San Diego region in 2012 was unable to match the unprecedented wave of trophy property sales seen in 2011 — when some of the region’s largest hotels changed hands, including the Manchester Grand Hyatt, Hilton San Diego Bayfront and Hotel del Coronado.

For instance, the $570 million majority-stake purchase of the 1,625-room Manchester Grand Hyatt, by Host Hotels & Resorts Inc., was the largest U.S. hotel transaction of 2011’s first half.

The Big Deal

According to Atlas Hospitality Group, the biggest local hotel deal of 2012 involved downtown’s Westin San Diego, a 436-room property purchased in July for $122.8 million by Maryland-based DiamondRock Hospitality Co.

As of Nov. 19, the top five was rounded out by the sale of the 284-room Marriott San Diego Del Mar, for $66 million; the 429-room Hyatt Regency Mission Bay San Diego, for $62 million; the 257-room Hilton San Diego Del Mar, for $41.1 million; and the 90-room Inn at Rancho Santa Fe, for $28 million.

In coming months, Reay said, investors likely will be gravitating toward smaller, midpriced chain brands that have recently gained popularity with business and recreational travelers seeking high-tech amenities, such as Courtyard by Marriott and Hilton Garden Inn.

Reay said hotels in that “upper limited service” category cost less to build and have lower overhead costs to operate, since they usually don’t have amenities like full-service restaurants and spa services, making them generally more profitable than other hotel types. A rising number of lenders are looking to finance development and sales in that category, including large national banks and international investors, led by those in China.

Tax Advantages

On the seller side, more properties could be going on the market, for instance, if owners decide to sell before capital gains taxes rise in 2013. The rate could rise next year from its current 15 percent to a rate of somewhere between 20 percent and 25 percent.

Property price tags could continue to rise if current revenue trends hold up. According to Smith Travel Research, San Diego County hotels in the first nine months of 2012 saw occupancy up 3.3 percent over the same period of 2011, with average daily room rates up 5 percent and revenue per available room up 8.5 percent.

Local hotels tallied more than $1.5 billion in total revenue in the January to September period, rising 8.5 percent from a year ago. All of the region’s major indicator growth rates were ahead of U.S. numbers.

Reay noted that national hotel revenue is currently on track to set a single-year record. U.S. revenue for 2012 had surpassed $88.4 billion at the end of September, up 7.3 percent from a year ago, according to Smith Travel.

Reay said California coastal gateway hotel markets such as West L.A. and San Francisco have already matched or surpassed their pre-recession revenue figures, and the San Diego market will likely do so in 2013.

John Vorsheck, regional manager in the San Diego office of brokerage firm Marcus & Millichap, said those trends will likely bring an increase in hotel transaction volume in the coming year.

“With two years of positive growth in average daily rates, occupancy and RevPar, the uncertainty in the market has subsided and investors are looking favorably at hospitality properties throughout San Diego County,” Vorsheck said.

Overall, Marcus & Millichap recently reported, investors are finding fewer distressed properties to bid on, and listings of nondistressed assets continue to grow. Investors are looking beyond the large metro areas of California into secondary markets across the state, the brokerage firm said.

Marcus & Millichap said California hotels have recently benefited from a rise in visitors to theme parks and other leisure destinations, and increasing numbers of tourists from China and other Asian countries. Fourth-quarter numbers, however, could be impacted by recent uncertainty regarding the federal and state budget situation, though long-term indicators remain strong.

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