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--- The San Francisco Hotel Investment Climate in the Post-Tech Boom Paradigm |
By Anwar Elgonemy, Jones Lang LaSalle Hotels
October, 2002 A celebration of beauty, romanticism and capitalism, San Francisco will always be one of the world�s most engaging hotel markets. While investors are currently negative concerning the short term trading performing of San Francisco, reflective of its exposure to the tech sector, the City is among the top five markets expected to enjoy the largest turnaround in trading performance between the short and medium term. Given San Francisco�s longstanding prominence in the convention and leisure travel segments, the current decline is definitely not expected to presage an enduring collapse like the 1980s. Convention center hotels, comprising approximately one-third of the City�s total room inventory, dominate the San Francisco hotel market. The luxury hotel segment, in turn, has the lowest share of product but boasts the highest barriers to entry. |
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Product |
of Total (1) |
Entry (2) |
Sub-Markets |
Convention |
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Economy |
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Fisherman�s Wharf |
Mid-tier |
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Boutique |
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Luxury |
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(1) Total supply is
approximately 33,000 rooms.
(2) Relative to the San Francisco market. |
The short term (and steep) drops in occupancy will certainly have vultures circling for bargains, but when the economy revives by 2003 (assuming no major terrorist attack in the meantime), sellers will emerge to cover their losses and buyers will be well positioned for the upswing. |
Factors indicating that San Francisco�s performance will
once again strengthen include the following:
Major transactions in the San Francisco hotel market between
1998 and mid-2001 indicate that the highest price per key recorded during
that period was for the sale of the Ritz-Carlton ($479,200 per room), with
the average price per key at approximately $262,000, one of the highest
in the nation. The average initial yield for new acquisitions in San Francisco
up until mid-2001 was close to 9%, increasing to 10.5% by mid-2002; the
average leveraged IRR is currently close to 22%.
With the June 2001 sale of the Mandarin Oriental being the most recent major deal in the City, the hotel transaction market is just beginning to come to life. Kimpton Hotel & Restaurant Group, a San Francisco-based owner/operator of boutique properties, is selling five of the 16 San Francisco properties it runs. In San Francisco, as in other markets nationwide, the funding void left by the absence of Wall Street will continue to be filled by mostly private equity, opportunity-type funds. Increasingly, investors are discovering that hotel real estate investments held by private equity funds hold a number of advantages. First, they generally provide investors with steady and predictable cash flows while also taking advantage of many of the tax-efficient features of real estate investing, namely significant depreciation and interest expense write-offs, while freeing investors from the hassle of owning and managing real estate assets. Second, with properly placed investment choices, lodging real estate investments often can yield significant asset appreciation. Although hotel financing in the Bay Area is extremely difficult to attain, lenders are still providing leverage and borrowers who have experience will find financing much easier to obtain. Jones Lang LaSalle Hotels has secured a $22 million construction loan - approximately $468,000 per unit - for Calistoga Ranch, a 167-acre, mixed-use luxury development in northern Napa Valley. In San Francisco, a city celebrating both shrewd finance and high romance,
it is evident that until the overall economic conditions improve, many
hotel investment groups will continue to hold off on their strategic real
estate decisions. But when the rebound does start to occur in 2003, these
investors need to be well poised with a hotel real estate investment banker
to take full advantage of the coming upswing.
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Anwar R. Elgonemy Associate Jones Lang LaSalle Hotels 2655 Le Jeune Road, Suite 1004 Coral Gables, Florida 33134 Tel: (305) 779-4958 Fax: (305) 779-3063 [email protected] www.joneslanglasallehotels.com |
Also See | Debt Financing Alternatives & Debt Restructuring Strategies in the Lodging Industry / Anwar R. Elgonemy / Sept 2002 |
Concrete to Cash: Real Estate Sale-Leasebacks in the Lodging Sector / Jones Lang LaSalle Hotels / March 2002 | |
The Dynamics of a Hotel Deal in Mexico / Jones Lang LaSalle / July 2002 |