Robert Selna, San Francisco Chronicle
Monday, August 24, 2009
After two notable and high-end San Francisco hotels defaulted on large loans last month, the city's hotel economy - a key contributor to municipal coffers - has only become bleaker.
On July 8, owners of the stately, 97-year-old Renaissance Stanford Court on Nob Hill defaulted on an $89 million loan. Three weeks later, the glitzy Four Seasons Hotel, built on Market Street in 2001, withheld payment on $90 million it owed.
The explanation for the ailing hotel industry is straightforward: High unemployment and job insecurity have meant that patrons aren't willing to pay as much as they have in recent years. In June, the average room rate in San Francisco was $134, the lowest it has been since 2005 and well below the $162 peak in June 2008, according to PKF Consulting, which tracks hotel industry trends.
For a while, managers filled rooms by offering lower rates, but the number of visitors also has begun to slide, and in June, occupancy tumbled to 73 percent, down from 85 percent the same time last year.
Add to the troubled mix the fact that many hotel owners, in San Francisco and across the state, financed purchases or refinanced loans between 2005 and 2007 - when the hotel values were at their peak. Since then, hotels statewide have lost 50 to 80 percent of their value, meaning that many owners owe far more than their asset is worth.
Hospitality industry analyst Alan Reay calls the situation a "perfect storm" that won't improve any time soon - probably not until 2011.
"We won't hit the bottom on this until we see stabilization in employment and income," said Reay. "Plummeting revenue and an inordinate amount of debt on these properties is a recipe for disaster."
More defaults expected
Seven San Francisco hotels are currently in default, but Reay and others expect more defaults in the coming months and believe that some hotels will go into foreclosure. Apart from the Stanford Court and Four Seasons, the distressed hotels have confidentiality agreements that keep their identities private.
Alongside the owners who can't pay off their loans, it appears the city itself has taken the biggest loss as a result of the hotel slump. Data from the San Francisco Controller's Office shows that the city's hotel-related revenue is expected to decline by 9 percent in 2008-2009 to $203 million and to drop to $173 million in 2009-2010.
Ted Egan, San Francisco's chief economist, said hotel occupancy taxes and property taxes comprise about 7 percent of annual revenues that go to the city's general fund, the highest amount from the private sector. The next biggest tax contribution from private industry comes from payroll taxes, but they typically represent less than half of hotel taxes, he said.
Nearby destinations also are suffering. Based on the key indicator of revenue per rooms available, San Francisco and Oakland were down 24 percent from the previous June and the San Jose/Campbell area has plummeted 32 percent, according to numbers compiled by Reay's Atlas Hospitality Group.
Smaller California towns that rely heavily on tourism also have seen established hotels flail. For example, the owners of Sausalito's turn-of-the-century Casa Madrona Hotel recently filed for bankruptcy after defaulting on a $24 million loan.
Rates fall nationwide
The problem is not limited to California. For example, the average price for a Manhattan hotel room now is about $200 a night, down almost one-third since last year.
Hotel companies (as opposed to owners) are relatively sheltered from the real estate disaster, Reay said. Many hotels are no longer owned by companies bearing the hotel's name, such as Marriott and Hilton, but instead are managed by them. The Stanford Court is an example.
While cheaper rooms are a boon to visitors, some hotels have had to cut services to correspond with declining rates. Room service may no longer run all night and fewer staff may be on hand to ensure a comfortable stay.
Scott McCoy, Stanford Court's general manager, said the hotel had "calibrated services with the expectations of guests" and had made some changes, but that it was essentially the same hotel.
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