|SAN FRANCISCO, Oct. 8, 1999 - PKF Consulting announces the publication
of its first edition of the San Francisco Bay Area Lodging Investment
Databank. This report provides an annual status report on the key economic
indicators influencing the San Francisco Bay Area’s lodging markets.
As 1999 still finds the San Francisco Bay Area in the midst of a rapid
economic expansion, real estate development has been responding vigorously.
Hotel developers have been building in response to strong room rates and
high occupancy levels. Nevertheless, "a savvy real estate investor should
always be looking at the pertinent indicators and market fundamentals,
as the good times don’t last forever," says Anwar R. Elgonemy, an Associate
with PKF Consulting, who compiled the report.
International & U.S. Economy and How it
Affects the Bay Area
The U.S. economy has remained strong despite the recent economic crisis
in Asia, the upheaval in Russia, and uncertainties in Europe and Latin
America. This resilience has been attributed primarily to the Federal Reserve’s
highly effective management of interest rates, coupled with low unemployment
(4.2 percent in 1998) and low inflation (1.6 percent in 1998).
Ramifications from the indicated world events have had only a mild impact
on the Bay Area, as the state’s expansion industries, including telecommunications
and data communications, outweighed the decline in Asia-bound exports felt
by computer chips, semiconductor equipment, and agricultural products.
As a result, the Bay Area’s overall economy remains balanced in 1999.
The Bay Area, with its highly diversified economy fueled by the high-tech,
biotech, and tourism sectors, has remained strong. However, the Bay Area’s
unique economic vitality is not perfect, and the region has weaknesses
to overcome. The following table highlights the primary positive and negative
attributes of the Bay Area economy today, impacting the region’s real estate
Positive & Negative Attributes
The Bay Area Economy
Entrepreneurial companies are
leading the growth
Leading export producer
Highly diversified economy and
The individual business traveler market segment
is comprised primarily of visitors to local companies, independent sales
people, employees in training, and other business people associated with
firms in the Bay Area. The demand for rooms in this segment is at its peak
from Monday through Thursday.
The group meetings segment primarily includes
corporate meetings and convention business generated by citywide functions
held at the Moscone Convention Center and the San Jose Convention Center.
Leisure travelers include national and international
visitors to San Francisco attracted to the Wharf for its tourist attractions,
waterfront location and convenient access to other parts of the City. This
segment also includes domestic, European, and Asian tour groups, which
tend to be high in the summer and fall months. The level of tourist activity
in San Francisco is closely related to fluctuations in the national economy
and the strength of the dollar against foreign currencies. Leisure demand
is more rate-sensitive than the commercial and group meetings segments.
Several factors indicate that the Bay Area’s
occupancy premium will continue:
New Hotel Development
Following decreases from 1989 through 1991,
the Bay Area’s percentage-point premium has remained at, or above, the
national average by more than five points since 1995;
The underlying strength of the Bay Area’s
highly diversified economy; and
The Bay Area in general, and San Francisco
in particular, continues to be perceived as a world-class destination for
leisure travelers and convention planners.
The San Francisco Bay Area is a market
with a limited amount of available land for new construction, which indicates
that new-build and conversion opportunities within San Francisco are still
attractive development options. Given the strong interest in new hotel
development, coupled with the Bay Area’s position as a world-class destination,
we have assumed that it is highly likely that all of the indicated planned
projects will materialize.
With occupancies and average daily room
rates still strong in most of the nation’s markets, expense efficiencies
achieved by hotels have allowed the improved margins to flow into net operating
income, heightening the attractiveness of lodging properties as an investment
category. Despite such favorable underlying operating fundamentals, underwriting
parameters for hotel acquisitions are very restrictive. However, such confining
parameters have not deferred the turnover of lodging assets in the Bay
Area, the nation’s "nirvana" economy.
The question is, will this turnover in
California’s hotel assets continue throughout 1999 and into 2000? Within
the hotel industry’s financial sector, there is still a concern that the
easy money has already been made, and that the growth and momentum investors
have sold their positions and have not yet been replaced by value investors.
Yet, as REIT companies are being forced to sell because of their declining
stock prices and expensive capital, more affordable hotels compared to
last year’s prices will be placed on the California market over the coming
months. In addition, it is expected that capital should become more available
by the beginning of 2000, as hotel owners’ valuation expectations become
more realistic, and the dynamics of capital supply and demand once again
interact in a more rational manner. This means that the Golden State will
see another strong year for hotel transactions, continuing to be the place
where national trends are defied.
Hotel Land Sales
Land in the Bay Area is expensive given
the complexity and difficulty to obtain governmental entitlements for hotels.
On the positive side for hotel owners, elevated land values in the Bay
Area result in commercial lodging remaining in short supply. This barrier
to entry creates a limit on supply that tends to keep market occupancy
rates and ADRs high, even during downturns in the economy.
Where are the
Cycles directly affect financial performance
by influencing market rents and the ability to sell for a satisfactory
price, if at all. This influence can be traced to the fundamental factors
of capital availability, supply and demand, and expectations. Each has
a different role in the expansion and contraction phases of market cycles.
What Does the Future
Hold for Bay Area Hotel Investors?
The vast majority of the Bay Area’s primary
hotel markets are in an expansion mode, with some areas showing slight
signs of a slowdown.
More traditional investors and lenders will
return to fill the void that the rapid exit of REITs and CMBS conduits
created in the market.
Well-capitalized private investors and funds
will become more active.
Stable occupancies levels, but a tapering-off
Required returns and capitalization rates
will continue to be pushed higher as a result of more expensive debt, coupled
with the more stringent underwriting requirements of these private and
institutional capital sources.
REITS will play a much lesser role as they
no longer have the capital to be major buyers, and they may become net
The publication can be ordered by contacting PKF Consulting at the following
address. Copies are $150.00.
|The PKF Consulting San Francisco Bay Area Lodging Investment Databank
includes an up to-date analysis of the following topics:
International & U.S. Economy and How it Affects the Bay Area
Consumer Price Index
Hotel Brand Representation in the Bay Area
Largest Demand Generators
Market Performance Levels (Bay Area occupancy and ADR from 1990 to 1998)
Demand Profile (market segment analysis)
Major Construction Projects
New Hotel Development
Construction Costs (by hotel type)
Top Ten Hotel Transactions (including capitalization rates and revenue
Hotel Land Sales (price per square foot and price per guest room)
Where are the Opportunities (city by city analysis)
What Should Your Investment Strategy Be?
What Does the Future Hold for Bay Area Hotel Investors?