Chris Barnett on Business Travel
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High Times, High Prices at San Francisco Hotels
February 26, 2015 -- San Francisco's hotel occupancy rates are soaring. Room rates are rising fast. Yet no one's building new hotels in the City by the Bay. Because they can't.

Whenever land is freed up in San Francisco, it's snapped up for an office tower aimed at the high-tech sector. Or the land goes to multimillion-dollar condos for high-earning techies bored with the culturally sterile Silicon Valley.

What's a hotelier to do? The strangest things. In just the last 30 days:

Hilton Worldwide took some of the nearly $2 billion it earned selling the Waldorf Astoria in New York and purchased the frayed-around-the-edges Parc 55, a 1,024-room behemoth near Market Street that previously flew the flags of Ramada, Renaissance and Wyndham. It's already selling out some nights with room rates as high as $400 a night.

A Maryland hotel investment firm bought a tired, 681-room hotel on Market Street, which started life in 1984 as the Le Meridien and has been the ANA, the Argent and, most recently, the Westin Market Street. The new owners immediately stripped the Westin brand off the property, renamed it the Park Central and are quoting as much as $600 a night for a standard king room.

Loews Hotels is acquiring the 158-room Mandarin Oriental, the most luxurious property in town. Not even insiders knew the management contract for the hotel, situated on the top 11 floors of a 48-story building in the financial district, was available. Until the deal closes next month, Mandarin continues to sell guestrooms for as much as $900 a night.

Those are just the headlines. The backstories are more ominous for business travelers who need a decent room at a fair price in San Francisco. More reflagging, name changes and price hikes are on the way.

"San Francisco is arguably the best hotel market in the United States for investors," says Thomas Callahan, president and chief executive of lodging experts PKF Consulting. "The city's strength as a knowledge-based economy and a leisure destination and the lack of new capacity are all reasons we should continue to be the best-performing hotel market--for investors."

That translates into bleak tidings for business travelers. In January, according to STR, a hotel-data firm, the average daily rate in San Francisco jumped to $219. That's a year-over-year leap of 16.9 percent, almost five times the nationwide average.

"We're the most supply-constrained major hotel market in the country and we're getting double-digit rate increases because of the supply/demand imbalance," says Suzanne Mellen, senior managing partner of HVS, a San Francisco hospitality consultancy.

Mellen expects to see more deflaging and generic naming of hotels and cites the Park Central as an example. "Debranding is a trend in San Francisco because very young, tech-savvy [guests] respond to Internet marketing and are not drawn to traditional brands."

Indeed, a hotel on Fisherman's Wharf recently shed its Hilton brand and now markets itself as the Pier 2620. The venerable Stanford Court, once the crown jewel of Nob Hill, has dropped its affiliation with Marriott's Renaissance brand and has returned to independent status.

The sale last week of the Mandarin Oriental, a so-called "off-market" transaction, came as a shock. GEM Realty Capital of Chicago bought the Mandarin in 2012 for $63 million--or $398,000 a room. It spent $20 million more on a renovation that included an 8,000-square-foot spa. The upgrade helped the property regain its fifth star from the Forbes (nee Mobil) Guide and it is now ranked as San Francisco's top luxury property on TripAdvisor.com.

Why sell a gem with a universally well-regarded brand and a commanding position at the top of an extraordinarily hot market? Money, says Alan X. Reay, president of California's Atlas Hospitality Group

Although the sale price has yet to be disclosed, Reay thinks publicly traded Loews Hotels "at the very least" will pay more than $479,000 per room for the right to fly its flag over the soon to be former Mandarin. That was the per-room price that Thayer Lodging of Maryland paid in 2013 when it acquired the 336-room Ritz Carlton San Francisco for $161 million. GEM could be cashing out at $600,000 a key, Reay suggests, a nifty profit of about 40 percent in just three years.

But Goldman Sachs has done even better on the sale of the Park Central. One of its subsidiaries and Highgate Holdings, a minority partner, bought what was then called The Argent for $170 million three years ago. The property, by then marketed as the Westin Market Street, sold last month for $350 million.

The buyer of the Argent/Westin/Park Central, LaSalle Hotel Properties, also has the distinction of paying the highest per-room price of any hotel in San Francisco. It paid $640,000 a key in 2014 for Hotel Vitale, a waterfront boutique property. LaSalle also owns a half dozen other hotels in San Francisco.

At more than $500,000 a room, LaSalle may have gotten a deal on the Park Central. Its next door neighbor, the Moscone Center, San Francisco's primary convention facility, is about to undergo an expansion that could cost as much as $500 million.

"It's a good hotel in many ways," says Rick Swig, president of RSBA & Associates, a San Francisco hotel consultancy. "But it does not have a high percentage of meeting space to fill 681 rooms. It will need more [independent] travelers than most hotels."

That may be why LaSalle and Highgate, which is managing the Park Central, have hedged their bets. Although the Westin name is gone, you can still find the Park Central listed on the Starwood Web site. The hotel also continues to give Starwood Preferred Guest points for stays and you can burn SPG points for award nights. The Park Central has its own site, too.

The Park Central's simultaneous lives as a former Westin, an independent property and a still-functioning part of Starwood Preferred Guest are confusing--and no one is talking about the future. LaSalle is promising a renovation in 2016, but the hotel desperately needs one now.

Amanda Broadnax, a learning and development executive with J.R. Simplot, thought she was checking into a Westin when she arrived at the Park Central. She noticed the wear and tear. "It's a little more run-down than I was expecting," she said. "But the service has been excellent."

Hilton's acquisition of the Parc 55 is more straightforward. Hilton immediately renamed it the Parc 55, a Hilton Hotel. Brokers say the property fetched $550,000 per key, although Hilton won't confirm that number. Even though the hotel underwent a $30 million refurbishment in 2009, it's tatty and also needs an upgrade. But the purchase is solidly strategic. The property is teaming up with the massive, 1,912-room Hilton Union Square several blocks away and cross-selling guestrooms and conference space.

How long will the party last for hotel owners and the chains peddling rooms in a trendy town with too much demand and not enough supply?

No one knows for sure, of course, but John Handlery, the longtime owner of the Handlery Union Square hotel, has seen the boom-and-bust nature of things in San Francisco before.

"When things are rocking and rolling, hotels change hands," he opines. "Owners say, 'I can make good money and I'm outta here.' But we have cycles. In '79, things were flying. In '81, it hit the fan."

This column is Copyright 2015 by Chris Barnett. JoeSentMe.com is Copyright 2015 by Joe Brancatelli. All rights reserved. All of the opinions and material in this column are the sole property and responsibility of Chris Barnett. This material may not be reproduced in any form without his express written permission.