Bay Area hotel decline is largest in the nation

Struggling with half-filled hotels, city considers more conversions for homeless

San Francisco /
Nov.November 02, 2021 09:15 AM
Top-performing market had farther to fall, CoStar says (iStock)

For insight into the woes of San Francisco hotels 18 months after the pandemic shut down travel, consider a single statistic: At $92 a night, rates have sunk by almost 60 percent — a U.S. record drop for revenue per available room.

The Bay Area is also tied with Oahu for the steepest decline in hotel occupancy since October 2019, according to data from CoStar subsidiary STR. Slightly more than half its hotel rooms were occupied in late October, a 40 percent plummet from before Covid.

“San Francisco was a top-performing market, so it had further to fall,” said Emmy Hise, CoStar’s director of hospitality analytics for the Western U.S. “But even looking at absolute values, it’s one of the hardest-hit markets.”

The city has failed to make consistent headway across leisure, conventions and group sales since the start of the pandemic, Hise said. International and business travelers, who typically pay the highest hotel rates, are of particular concern.

Overseas visitors have dropped by almost 75 percent since 2019, when they made up more than 28 percent of overnight visitors and more than 60 percent of all overnight visitor spending, according to the San Francisco Travel Association.

Corporate travel has been stymied by a Delta-related delay in return to offices and shifting local regulations regarding large group gatherings. In 2020, groups booked just a tenth of the record 1.2 million convention-related room nights from 2019, and this year is expected to be another 50,000 room nights below that. Cancellations of citywide conventions in those two years represent a $1 billion loss in direct spending, according to SF Travel.

If there’s a silver lining, it may be that the city is trying to convert more hotels to permanent supportive housing. Taking advantage of a state program called Project Homekey, it’s been asking hotels that have housed the homeless during the pandemic whether they want to sell. Several, but not all, have taken them up on their offer and more are likely to be converted in the near future.

Local government interest in buying hotels is an “emerging trend” throughout the Western U.S., where barriers to building are high, keeping newcomers out of the San Francisco market, Hise said.

Another potential sign for optimism: Some of the city’s biggest hotel owners have been making a “smart play” by selling off some properties this year to repay debt on others and maintain a presence in the area, she said. Behind the scenes, some owners are giving up a percentage of their equity to cover debt rather than sell the entire hotel, she said.

Others are dumping properties altogether. Pebblebrook Hotel Trust, one of San Francisco’s largest hotel owners, sold the historic Sir Francis Drake Hotel for $158 million in April to Northview Hotel Group. In September it closed on an $87.5-million deal to sell Union Square four-star Villa Florence to AWH Partners. Each deal brought buyers into the San Francisco hotel market for the first time.

Pebblebrook CEO Jon Bortz said the Maryland-based REIT would “likely sell a few more” of its 10 remaining San Francisco hotels and “reallocate that capital to markets that we think have more attractive risk-return opportunity,” according to the San Francisco Business Times. Bortz also said “betting against San Francisco in the long term would be a mistake.”

As PPP loans and other federal assistance come to an end, Hise said she wouldn’t be surprised to see some sales of distressed hotels. Longer term, she’s bullish.

“San Francisco is the only market to truly go from the top to the bottom,” she said. “But I really think the city will recover and I think a lot of other people do, too.”





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