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Why S.F.'s Hotel Market Is So Hot

San Francisco Hotel

It's only April, yet S.F.'s hotel market has seen a bevy of transactions. And we have word of one more that's about to close. (And everyone knows April showers bring May transactions.)

Mid-Market's Grant Building has long sat vacant at the corner of 7th and Market, but sources tell us a buyer has been picked and the plan is to put in a “micro” boutique hotel concept. That means the rooms will be smaller and more efficient, with a lower price point. The buyer—whose name we have yet to confirm—is also going for "the cool effect," one source tells us. Tons of micro hotel product already exists in New York, like The Jane in Greenwich Village. (Remember when trashing a hotel room actually required you to walk from one end of the room to the other?)

Just yesterday news broke that Bellevue-based Pineapple Hospitality made its first move in S.F., scooping up the century-old Hotel California at 580 Geary, above (cue the Eagles song). Another active S.F. hotel buyer is Pebblebrook, and finance head Matt Partridge says as visa requirements are relaxed for certain countries, more S.F. rooms could be filled. Last year, visitor spending reached the highest ever, with more than $9.3B dumped into local businesses (up 2.3% from 2012).

In December, Pebblebrook picked up the Radisson Hotel Fisherman's Wharf and Retail for $132M, with a renovation expected this fall. The recent Hotel Vitale sale may or may not set a new standard for pricing in the city; Matt imagines that whopping $650k per-key price Lasalle paid is an anomaly in the short term and maybe two years from now it will be ahead of the market. He expects to continue to see acquisition activity in S.F. this year. He declined to name specific properties but did confirm that some of S.F.'s 200-plus hotels are for sale.

Nob Hill's iconic Mark Hopkins traded in February for about $120M. But more capital sources are starting to migrate away from core CBD opportunities because of the competitiveness of pricing, one unnamed hotel broker tells us. Investors are flocking toward quality assets in secondary markets, also shifting from core to value add. REITs that would traditionally look for that "white elephant" are starting to consider properties that wouldn't fit squarely into their usual strike zones, he says. Their criteria seems to be expanding, and there's more capital than there are deals out there by a long shot, he says. 

Matt brought up an interesting point about why there's not a ton of new hotel development here. (The city's first full-service hotel project since 2008 was announced in January in SoMa, rendered in the back.) Average daily rates in S.F.'s CBD are below those in NY by a decent margin. But apartment rates here are slowly moving toward NY rates. With that spread, it makes more financial sense to develop residential. (If you have a shovel, build a kitchen, not a key.)