Bay Area Hotel Distress Mounts as Loan Maturities Hit

The hotel sector surged as the health of the tech industry kept investors and lenders bullish on the Bay Area between 2018 and 2019, when Silicon Valley and San Francisco were hotspots for major conferences and corporate meetings.

That made the pandemic-era lodging nosedive all the more dramatic, and despite signs of healing, San Francisco, Silicon Valley and the East Bay haven’t fully recovered.

Now, a wave of defaults, foreclosures and sales is hitting the region’s hotel industry as loans taken out between 2018 and 2021 are maturing amid high interest rates, inflated costs and lower revenue.

Two Silicon Valley hotels received notices of default last month and another was sold in a deed-in-lieu of foreclosure.

The Barnes hotel in San Francisco’s Union Square sold after its previous owners defaulted on a loan, and the Stanford Court Hotel hit the market under a looming foreclosure.

A pair of Hyatt House hotels in the East Bay sold for pennies on the dollar at a foreclosure auction. And Blackstone purchased Napa Valley’s Stanly Ranch resort out of foreclosure, though analysts have emphasized that the luxury resort market is anomalous to the trends seen in the Bay Area.

The distress wave, which swelled last year with the sales of some of the largest hotels in San Francisco, Oakland and San Jose, is far from its crest, said Alan Reay, president of Atlas Hospitality Group, a Southern California-based firm that closely tracks hotel transactions in the state.

He expects more distress to play out over the next year or two, as many hotels are still running deficits following the pandemic.

The first quarter of this year showed an uptick — thanks, in part, to the Super Bowl — but hotel revenues are far below 2019 throughout the Bay Area and Silicon Valley.

San Francisco’s hotel economy was among the hardest hit by the pandemic, said Alex Lee-Bull, a hotel market analyst with real estate services firm CBRE.

The city’s revenue per available room — or “RevPAR,” the industry key economic indicator — dropped more than 64 percent, from $203 to just under $73. By the end of last year, that number had grown to $155, still nearly a quarter below the 2019 high, according to CBRE.

Oakland’s revenue per available room fell by half after the pandemic hit, from $118 to $59. Today, it has creeped back to almost $90, also about a quarter drop-off below 2019. Silicon Valley has shown the strongest recovery: Revenue fell by more than 62 percent right after the pandemic, from $145 to just under $55, but now stands around $120 per available room.

Despite that upward trend, the distress comes down to simple math. When it’s time to refinance, decreased revenue combined with increased costs for labor and supplies signals, for many, the end of the rope.

Even if a hotel’s net operating income remained steady from 2018-19 until now, it would still struggle to refinance a maturing loan because of high interest rates, Reay said.

Rates jumped from about 3 percent in 2021 to 6.5 percent this year. That difference could shave 30 percent off a property’s value when it’s time to refinance, Reay said.

The vast majority of loans originated between 2018 and 2021 were 5-to-7-year loans, Reay said.

“If these loans were not coming due, we wouldn’t see the distress level that we’re seeing,” Reay said. “Otherwise, these owners might cut the check each month to pay the deficit on the hotel monthly payment and say they’ve got to hang in here long enough to get the revenue back up so they can get out. But the problem is, the loans are due now, and the banks are not going to refinance you in the low fours.”

However, the sector is showing encouraging signs, said Henry Bose, a senior vice president with CBRE’s hospitality sector. Revenues per available room appear to have bottomed out in San Francisco and Silicon Valley.

Although San Francisco is far below its peak, Bose said investors see opportunity, and institutional money has started to return. Last fall, Blackstone purchased the Four Seasons, and Newbond Holdings bought two of the city’s largest hotels in Parc 55 and the Hilton Union Square.

Over the last six months, Bose said San Francisco’s hotel market has been a national leader in revenue growth. As recovery takes shape, and hotel values start to find equilibrium to the loan values, lenders are less inclined to extend and pretend on maturing loans. Because of this, Bose forecasts more movement over the next six months.

“Lenders are being more forceful,” Bose said. “We’re likely to see a little bit more lender processes or lender-influenced processes.”