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.

• The Bay Area is the headquarters to some 25 of the nation�s leading Fortune 500 companies, and is expected to continue to attract a highly educated work force in finance, bio-tech, and the law;

• Over the next four years, SFO passenger volume is expected to increase significantly, with forecast volume reaching 51 million passengers by the year 2006;

• The City�s percentage-point premium remained at, or above, the national average by more than five points between 1995 and 2000;
• The underlying strength of the Bay Area�s highly diversified economy; 

• San Francisco continues to be perceived as a world-class destination for leisure travelers and convention planners; 

• High land costs will continue to limit new hotel supply; 

• The difficult development process and related Bay Area political constraints will obstruct new supply; and

• The $191 million, 300,000 square-foot expansion at the 980,000 square-foot Moscone Convention Center will be completed by April 2003, with a strong convention calendar already on the books.

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%.
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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.
 
 

Anwar Elgonemy is an Associate with Jones Lang LaSalle Hotels with extensive experience in the San Francisco lodging market.  Jones Lang LaSalle (NYSE: JLL) is the world�s leading real estate services and investment management firm, operating across more than 100 key markets on five continents. Jones Lang LaSalle Hotels, the world�s leading hotel investment banking group, provides clients with value-added investment opportunities and advice. In 2001, its success story includes the sale of 7,972 hotel rooms to the value of US$1.3 billion in 39 cities and advisory expertise on 100,550 rooms to the value of US$26.3 billion across 255 cities. Jones Lang LaSalle Hotels� services include transactions, mergers and acquisitions, financial advice and capital raising, valuation, asset management, strategic planning, operator assessment and selection and industry research.