California hotel deals dollar volume during the first half of 2024 dropped nearly 50% compared to the same period in 2023.
The California Hotel Sales Survey 2024 Mid-Year from Atlas Hospitality Group found that the dollar volume dropped to almost $1.2 billion through the first two quarters, down from $2.3 billion in the first half of 2023. The number of individual deals, however, only dropped from 124 to 122, a 1.6% year-over-year decline.
Atlas Hospitality President Alan Reay said the number of hotel sales during the first quarter of the year were down dramatically and picked up during the second quarter. He had expected a drop in the second quarter as well. The decrease in dollar volume in the first half of the year comes after an already depressed first six months in 2023.
“So, we’re still at a pretty low number,” he said.
In fact, this may be the fourth-lowest dollar volume in the 25 years Atlas Hospitality has been tracking hotel sales in the state, Reay said. Those other years were in 2009 and 2010, due to the Great Recession, and in 2020 because of the COVID-19 pandemic.
“It's a definite sharp drop-off, no question,” he said.
If there is positive news, it’s that the number of individual deals only fell by less than 2%, meaning it’s almost flat, Reay said. California saw the average sales price of a hotel drop from $18.6 million last year to $9.7 million this year.
The fact that dollar volumes and likely the size of the transacted hotels are smaller is the result of a combination of factors, he said. Financing remains an issue, particularly when bringing interest rates into consideration, and financing for larger hotels is definitely more difficult to get. In recent years, the state has seen several of its larger hotels return to lenders or outright close their doors.
The other factor is that the push for unionization at hotels has increased labor costs, so potential buyers are looking to buy non-union hotels that tend to be smaller in room count.
Buyers predominantly have been the small to mid-sized hotel owner-operators, he said. They typically own and manage one or two hotels, so they have a little bit of infrastructure in place. They’re pretty hands-on with their properties.
Looking ahead to the rest of 2024, Reay said he expects to see a pickup in California hotel deals. The U.S. Federal Reserve is looking at cutting interest rates in September. Those who have raised capital for transactions are looking for distressed opportunities, of which there are a few.
“I think that you'll see them starting to step up and invest in deals,” he said. “We're seeing a lot of transactions that have been on the market now for over six months where prices are being reduced, and I think that is saying we're getting a little bit closer to what buyers are expecting to pay.”
Another factor is that as the end of the year nears, banks will become more motivated to get deals off their books, Reay said. The first wave of that will come through banks selling their loans, and that could lead to situations where an investor comes in and fast-tracks — or at least pushes forward on — foreclosures.
“So, all of those taken together, I think there's been a lot of people sitting on the sidelines, and I think that we'll see that, especially as interest rates go down, they may say now's the time to get it and deploy the capital,” he said.
Reay said he expects that momentum will carry over into 2025, especially based on the fact that the transaction market in California is so low, it can only go up.
“I don't see transactions going any lower than what we've seen in this first half of the year,” he said.