Many of today's buyers are counting on RevPAR to continue rising, but Reay questions whether it will rise at the same rate as it has. In the July issue of his Atlas newsletter, he raised the question of whether today's pricing reflects "irrational exuberance," the phrase made famous by former Fed chairman Alan Greenspan.

"The 'frothy' prices currently being paid for some hotels have many wondering if we are experiencing the same type of exuberance that Greenspan spoke of 15 years ago," Reay wrote in the July newsletter. "This year’s jump is the result of a surge in luxury hotel transactions, a sector that has been dominated by REITS, particularly in major cities. While RevPAR and net profit are climbing, the gains are no way near the levels that would justify the prices being paid."

In general, hotels selling for $25 million and more in California are trading at cap rates well below 6%, Reay says, and in San Francisco they are selling at well below 5%. In his newsletter, he notes, "The seemingly insatiable REIT appetite for quality assets in major cities has driven cap rates down to 5% and, in many cases, 3% to 4%."

The Atlas mid-year report shows that, in addition to rising 354% in dollar volume, California hotel sales for the first half of this year were up 90% (to 146 deals) in terms of individual sales, and the average price per room is up 31% to $106,287.

Dollar volume and number of sales increased pretty much across the board in California, with the exception of Orange County, where dollar volume declined by 20% and the number of sales fell by 5.1%. Reay says that is most likely because, in general, the hotel market in Orange County did not fall as far as it did in other parts of the state, so it hasn't had the potential to spring back as far as other markets.

In addition, Orange County hoteliers in general did not overleverage to the extent of those in other parts of the state. He contrasts Orange County with San Diego, where values plunged deeply but have since recovered dramatically.volume up 6,428.4%. Hotel sales in San Diego County increased 475% in the first half of this year (from four to 23), with total dollar volume up more than 6,400% (from $23 million to more than $1.5 billion.) One sale alone, the $570 million paid for the 1,625‐room Manchester Grand Hyatt in San Diego, far surpassed the entire total of the first six months of 2010.

Among the factors driving the zooming sales that are cited by Atlas in its mid-year report are the improved performance of hotels and strong pent‐up demand among buyers. The Atlas report cites Smith Travel Research statistics showing that California’s hotel occupancy during the first half of 2011 was 65.3%, up from 61.7% in 2010. RevPAR rose 11.2% for the state overall. Of the 28 California markets tracked by Smith Travel Research, 12 showed double‐digit RevPAR increases.

In addition, the Atlas report states, "Hotels, particularly California hotels, are one of the most desirable real estate investments today. Investors see huge upside potential as prices had dropped to historical lows and revenues are now rebounding. Investors feel that hotels should offer some of the best returns of any real estate investments over the next five years."

What will happen with pricing and whether some of the high prices will turn out to be justified remains to be seen, according to Reay. In his July newsletter, commenting on the prices being paid for some properties, he said "Only time will tell if the premium being paid today will work out for these buyers."