Experts
say there are great deals in the Bay Area, but they will require patience as the market makes its years-long recovery.
SAN
FRANCISCO — With several notable defaults, sales and foreclosures in the Bay
Area over the past year, hotel investors are asking when values will bottom out
and what kind of hold time will dealmaking require?
Experts told
Hotel Investment Today that San Francisco and Oakland are in very different
positions, with the former in the process of making an “amazing turnaround” but
not without long-term valuation consequences.
“[For San
Francisco] the good news is things are really looking up and turning around.
The bad news is it’s not like a one- or two-year turnaround,” said Rob Stiles,
founding principal and managing director of RobertDouglas. “This is going to
take some time, but it’s exciting that the turn is happening and some people
are going to make some really smart buys. But it’s going to be on a completely
reset table on valuation.”
News came
last week of the most recent default in the area, the 500-key Oakland Marriott
City Center, which is the largest hotel in the city’s downtown. The owners, Los
Angeles-based Gaw Capital USA, defaulted on their $100 million loan from
Invesco CMI Investments, putting the property at the risk of foreclosure. News
first broke in February of Gaw Capital USA, a division of Hong Kong-based Gaw
Capital Partners, skipping payments on the loan for the property it first
bought in 2017. Late last year, New York City-based Highgate handed back the
keys to the lender for the 686-key Hyatt Regency San Francisco Downtown SoMa.
[For San Francisco] the good news is things are really looking up and turning around. The bad news is it’s not like a one- or two-year turnaround. This is going to take some time, but it’s exciting that the turn is happening.
Rob Stiles
There is
also much speculation about what will happen on the sale of two of San
Francisco’s largest hotels, the 1,919-key Hilton San Francisco Union Square and
the adjacent 1,023-key Hilton Parc 55. The previous owner, Tysons,
Virginia-based REIT Park Hotel & Resorts, handed the hotels back to its
lender in 2023 as the maturity approached on a $725 million CMBS loan from
JPMorgan Chase. Park also sold another local property, the 316-key Hyatt
Centric Fisherman’s Wharf, earlier this year for $80 million to EOS
Hospitality.
Alan Reay,
president of Newport Beach, California-based Atlas Hospitality Group, who
tracks deals in the area, said he would be hard pressed to find any hotels that
went into foreclosure in San Francisco.
“San
Francisco was one of the strongest markets, even in major downturns,” he said.
“That’s why a lot of people have liked to invest in the city, because it really
seemed to be insulated from the downturn and recession. Maybe it was more
conservative investors with not a lot of debt, and that’s why we didn’t see a
lot of foreclosures. But this is unprecedented in terms of what we’re seeing in
that market right now.”
There have
been many signs of optimism this year about the San Francisco hotel market
starting to rebound after bottoming out last year, which was illustrated in a
study earlier this year from JLL. The study showed that the rebound was driven
by improved convention center performance, a resurgence of international demand
and big upcoming events. RevPAR bottomed out in 2024 and is showing signs of
robust recovery while convention center bookings are surging, with 2025 room
night pace up 50% compared to 2024.
Deals in
San Francisco
Experts
agree that San Francisco has some extraordinary potential deals right now.
“It’s a
question of when do we get back to kind of 2019 levels? Is it three
years, five years or seven years?” Stiles said. “I probably think it’s more
like five to seven years, but the turn has already started and that’s
really powerful.”
The real
question is whether investors can hold onto the asset while the market still
recovers.
“If you buy
at the right time, you have to have holding power because the cash flow isn’t
there yet,” Stiles said. “But if you have holding power and you have modest
financing, I think it’s a really interesting moment.”
That kind of
investment and foresight could especially come from international investors,
Stiles said.
We’re seeing values tumbling… 60% to 80% from where they traded before. That, in itself, is a huge buying opportunity. I think it’s fallen too far, too fast.
Alan Reay
“What I’ve
noticed over the decades is that international investors see through the weeds
and see value, whereas we get so caught up in the negative things in the U.S.
that sometimes it’s harder to make that bet,” he said.
For all of
San Francisco’s challenges, potential hotel deals also feature huge discounts
for replacement costs, Reay said.
“From a
valuation standpoint, you have investors that are already coming into this
market right now and seeing the prices as being very attractive,” he said.
“They’re all believing, as I do, that the city of San Francisco is not going
anywhere. It’s a great city to invest in on the long term.”
Interested
investors are a mix of existing and new players, Reay said. With values
bottoming out, investors are seeing phenomenal opportunities.
“We’re
seeing values tumbling… 60% to 80% from where they traded before. That, in
itself, is a huge buying opportunity. I think it’s fallen too far, too fast,”
he said.
Challenges
in Oakland
Experts also
agree that the recovery is going to take even longer in Oakland, which often
serves as an overflow market for San Francisco.
“Oakland is
a different story. From our standpoint, we have a lot of investors looking at
San Francisco. We don’t have anyone looking to buy into Oakland,” Reay said.
“If you’re saying three to five years for San Francisco, Oakland is probably
minimum seven to 10 years.”
Oakland is
facing plenty of demand headwind related to crime, homelessness and the fact
that the city has now lost all of its professional sports franchises.
“Oakland tends to lag San Francisco,” Stiles
said. “So, Oakland will come back when San Francisco is just crushing it.”