San Francisco Hotel Boom Avoids Nob Hill as Demand Shifts South

A booming hotel sales market in San
Francisco
may continue to avoid properties on Nob Hill, the posh
neighborhood overlooking downtown and the bay, as buyers focus
on the area surrounding the city’s convention center.

Investors paid a record $780 million for hotels in the 12
months through June, a 75 percent increase from the previous
year, according to broker Atlas Hospitality Group, whose data go
back to 1991. Operating costs won’t grow as fast as the amounts
lodging companies can charge guests, so future increases in room
rates will go primarily to the bottom line of owners and
operators, said Tom Callahan, president of PKF Consulting USA.

“San Francisco has never been this hot, ever,” Alan Reay,
president of Irvine, California-based Atlas Hospitality, said in
a telephone interview. “You have a low cost of capital, pent-up
demand and properties that wouldn’t normally come to market.”

The city’s revenue per available room, a measure of rates
and occupancy that is the most important metric for hotel
investors, is projected to rise 15 percent this year, more than
double the U.S. average, according to San Francisco-based PKF.
No new hotels are planned for at least five years, capping the
supply at about 33,000 rooms, Callahan said.

Business at the Moscone Center convention complex, which
has helped fill rooms in the South of Market area, will increase
conference-related hotel bookings by 7.5 percent this year, the
first annual gain since 2008, according to a forecast by the San
Francisco Travel Association.

Where Sinatra Sang

Hotel buyers are favoring the area over Nob Hill, where
Frank Sinatra and Ella Fitzgerald sang in nightclubs and
Hitchcock filmed scenes for “Vertigo.” It has been a favored
locale for the wealthy since a cable car line was installed on
California Street in 1873, according to Kevin Starr,
California’s former state librarian.

“Nob Hill is almost like an island up there,” Callahan
said. “It’s got a great name, but if you are a traveling person
you want to be proximate to South of Market, the convention
center, the business community.”

San Francisco’s hotel-investment boom has been evident in
the sales of Union Square’s JW Marriott for $96 million in
February; the Westin in the South of Market area for $172
million in March; and the Financial District’s Mandarin Oriental
for $63 million in May, the most expensive transaction on a per-
room basis, according to Atlas Hospitality.

The sales surge may be blunted by the 13 percent slide in
the Standard Poor’s 500 Index since July 22, even with
expected increases in San Francisco’s overall daily room rates
and occupancies, said Michael Depatie, chief executive officer
of Kimpton Hotel Restaurant Group LLC.

‘Things Will Change’

“It’s highly likely things will change,” said Depatie,
whose San Francisco-based company sold the Monaco San Francisco
in Union Square in September of last year and the Argonaut in
Fisherman’s Wharf in February. Those two, along with the Sir
Francis Drake in Union Square, which Kimpton operates, sold for
a combined $242.5 million. “Demand is linked to the economy.”

Real estate investment trusts, among the most active buyers
of San Francisco properties, may have used up their funds set
aside for acquisitions and now face retrenchment with share
prices down, said David Loeb, hotel analyst at Milwaukee-based
wealth manager Robert W. Baird Co.

Chesapeake Lodging Trust (CHSP), based in Annapolis, Maryland,
purchased Le Meridien San Francisco in the Financial District
for $143 million in December and the Hotel Adagio in Union
Square for $42.2 million in July, while Pebblebrook Hotel Trust (PEB),
in Bethesda, Maryland, bought the Argonaut for $84 million and
the Sir Francis Drake for $90 million, according to PKF.

Decisions Delayed

Would-be buyers will delay decisions until after September
at the earliest to see how much companies intend to spend on
year-end travel, according to Loeb.

“Why not wait to buy until you know the economic
forecast?” he said. “If it’s your last chance, you want to
make sure it’s a home run.”

While properties in other parts of the city are selling,
Nob Hill hotels remain on the market. Among them are the
InterContinental Mark Hopkins, whose Top o’ the Mark bar is off
limits to Jimmy Stewart’s “Vertigo” character because of its
precipitous view, and the Fairmont, where Tony Bennett publicly
debuted his signature song “I Left My Heart in San Francisco”
50 years ago in the hotel’s Venetian Room.

‘Exudes the Poetry’

“It exudes the poetry of urban life, like Sloane Square in
London, the Rue du Bac in Paris, or any comparable area,”
Starr, the former state librarian, said of Nob Hill. He has a
home in San Francisco and is now a history professor at the
University of Southern California in Los Angeles.

Even with its storied past, Nob Hill is underperforming the
rest of San Francisco. In July, the hotel occupancy rate was 92
percent in Fisherman’s Wharf, 90 percent in South of Market, 89
percent in Union Square and 86 percent in Nob Hill, according to
Smith Travel Research Inc. in Hendersonville, Tennessee.
Citywide, the rate was 79 percent this year through July,
approaching the 81 percent record set in the like period of
2000.

South of Market had the highest average nightly revenue per
available room for the first seven months of the year at
$147.06, followed by Nob Hill at $144.69, Union Square at
$123.45 and Fisherman’s Wharf at $116.68, according to Smith
Travel.

Accelerated Momentum

“The momentum toward South of Market was already going on
before I came on board five years ago, but it’s accelerated
within the last couple of years,” said Doug Housley, general
manager of the Four Seasons Hotel on Market Street, which opened
in 2001 as the district, also known as SOMA, was taking off.

A rough part of town for most of the 20th century, South of
Market was transformed during the mid-1990s technology boom with
rediscovered streets, rebuilt warehouses and a new Third Street
home for the San Francisco Museum of Modern Art, which led more
arts groups to move to the area. The Giants baseball stadium
followed in 2000, and a new convention center wing opened in
2003, adding 50 percent more space and increased foot traffic.

“The area around the convention center has become this hub
of activity, which is continuing to grow and definitely has had
an impact on hotels on the north side,” said Lew Wolff, co-
founder of Los Angeles-based Maritz, Wolff Co., which owns the
Fairmont with Saudi Prince Alwaleed bin Talal.

Condo Conversion Stalled

Wolff’s attempt to convert some of the 591 guest rooms to
condominiums stalled when city officials failed to act on his
request before a deadline shut the door on all condo
conversions. Wolff blamed the defeat on opposition from hotel
unions, who feared that eliminating hotel rooms would result in
fewer jobs.

“San Francisco has the highest union costs relative to
achievable room rates, and that could be a concern to somebody
interested in buying a hotel here,” Wolff said.

The Fairmont, which opened in 1907 and was featured in the
1980s TV series “Hotel,” is located on the cable car line and
an “icon of the city,” said Reay of Atlas Hospitality. Also
for sale on the line are the Huntington Hotel, owned by the Cope
family, and Stanford Court Renaissance, operated by Marriott
International Inc.

Even U.S. presidents seem to be part of the shift away from
the stately lodgings that, as the Bennett tune says, reside
“high on a hill.” Bill Clinton often stayed at the Fairmont
during visits to the Bay Area, while President Barack Obama has
twice opted for South of Market’s InterContinental San Francisco
on Howard Street.

“The desirability of Nob Hill is down,” said Callahan of
PKF. “It hasn’t fallen off the edge of the world for someone
who remembers the heyday. But for young people, not a chance.”

To contact the reporters on this story:
Dan Levy in San Francisco at
dlevy13@bloomberg.net;
Nadja Brandt in Los Angeles at
nbrandt@bloomberg.net

To contact the editor responsible for this story:
Kara Wetzel at
kwetzel@bloomberg.net

Article source: http://www.bloomberg.com/news/2011-08-27/san-francisco-hotel-boom-avoids-nob-hill-as-demand-shifts-south.html

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