GlobeSt.com: Do you see this trend continuing in the near term?

Kaplan: Yes.

GlobeSt.com: What else should our readers know about San Diego's hotel cap rates?

Kaplan: If you did an analysis of the five major sales worth noting last year in hotels in San Diego, in my opinion, the market cap rate should be 7.5%. So. why are cap rates in San Diego lower than what is perceived to be a market cap rate for San Diego? Of the five major deals, the average cap rate was 6.4% per deal, not weighted on the number of rooms. So, why are deals selling in San Diego below what's perceived to be a market cap rate of about 7.5%?

It's what I call an opportunistic metric—a cap-rate metric for hotels has to be looked at differently than other investment properties than hotels. Hotels are half real estate and half business. You have to resell that room every day; you're running a business, which is more of a risk, so cap rates are typically higher than in other asset classes. If we're using 7.5% as a base, I call it an opportunity metric, which is adding or subtracting from the current market rate. It's a positioning opportunity, a branding opportunity and an opportunity to operate a business better than the guy operating it currently. This changes calculations on what the property is worth.

One other metric you can add or subtract to the market cap rate is the wild-card metric. It could be that the buyer of the property is in a 1031 exchange, and they have a time limit to how long they can reinvest the funds from the last transaction. The pressure from that time limit may cause them to be willing to buy something at a lower cap rate because they have to place the money. What's also wild card is foreign capital, whereby the outlook for investment and returns is different. The adjustment might be zero; that will move the cap rates up or down from the market. This is what makes the hotel sector different from other sectors. I don't put much weight in cap rates because there are so many other factors.

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SAN DIEGO—A number of factors come into play to adjust hotel cap rates, including wild cards like 1031 exchanges and foreign buyers whose expectations differ from other buyers, CBRE's SVP of hotel and investment sales Bob Kaplan tells GlobeSt.com. According to the firm's latest North America Cap Rate Survey, the markets with the lowest cap rates for CBD full-service hotel properties were Washington, DC (6.00%); Seattle (6.25%); New York (6.25%); Boston (6.50%); and Los Angeles, Orange County and San Diego (all at 6.75%). Los Angeles, Orange County and San Diego had a remarkable 2016 in terms of foreign investment, with high levels of foreign capital also allocated towards hotel assets, contributing to the low cap rates. Similar to other sectors, confidence in the continued attractiveness of coastal markets to locals and foreign visitors alike and the appreciation of property values continue to buoy demand in this category, the report revealed.

We spoke with Kaplan about what is causing hotel cap rates in the San Diego market, in particular, to stay low.

GlobeSt.com: What is causing hotel cap rates in this market to stay low? (San Diego)

Kaplan: There are probably five factors keeping cap rates low. One factor is strong demand from across the board—all of the hotel buyers wants to be in San Diego. The business climate, leisure activities, universities—everyone wants it to be part of their portfolio. Secondly, the supply of available properties to purchase is extremely low. Our database shows only a couple of potential deals listed by hotel brokers, so inventory is very close to zero. Third is limited new development; there are a few sprinklings of San Diego hotels going through the planning process, and it's an extremely long process in most California cities; it can take three to four years to get approvals and start construction, so there's very limited new development going on in San Diego, although there is more new development than available properties to buy. Another factor to that is there are limited sites for development—you either have a zoning issue or residential demand that puts the pricing and value of that land much higher than for hotel use. Residential might fetch two to three times the value of that site if it were a hotel site, so you're limited to what is zoned for hotels only. Mission Valley, for example, is zoned for hotel and cannot be residential, so the land there will have hotel value, but most of those sites are spoken for. The fifth factor would be interest rates—as long as they stay where they are today, cap rates will be low, which is a function of alternative investments.

GlobeSt.com: Do you see this trend continuing in the near term?

Kaplan: Yes.

GlobeSt.com: What else should our readers know about San Diego's hotel cap rates?

Kaplan: If you did an analysis of the five major sales worth noting last year in hotels in San Diego, in my opinion, the market cap rate should be 7.5%. So. why are cap rates in San Diego lower than what is perceived to be a market cap rate for San Diego? Of the five major deals, the average cap rate was 6.4% per deal, not weighted on the number of rooms. So, why are deals selling in San Diego below what's perceived to be a market cap rate of about 7.5%?

It's what I call an opportunistic metric—a cap-rate metric for hotels has to be looked at differently than other investment properties than hotels. Hotels are half real estate and half business. You have to resell that room every day; you're running a business, which is more of a risk, so cap rates are typically higher than in other asset classes. If we're using 7.5% as a base, I call it an opportunity metric, which is adding or subtracting from the current market rate. It's a positioning opportunity, a branding opportunity and an opportunity to operate a business better than the guy operating it currently. This changes calculations on what the property is worth.

One other metric you can add or subtract to the market cap rate is the wild-card metric. It could be that the buyer of the property is in a 1031 exchange, and they have a time limit to how long they can reinvest the funds from the last transaction. The pressure from that time limit may cause them to be willing to buy something at a lower cap rate because they have to place the money. What's also wild card is foreign capital, whereby the outlook for investment and returns is different. The adjustment might be zero; that will move the cap rates up or down from the market. This is what makes the hotel sector different from other sectors. I don't put much weight in cap rates because there are so many other factors.