SANTA ANA, CA—There's not a lot of hotel product out there, and when it does come up, it gets chased pretty aggressively, driving cap rates down for top-shelf, select-service hotels, CBRE Hotels SVP Rod Apodaca tells GlobeSt.com. As we recently reported, Apodaca and Bob Kaplan arranged the sale of the 121-room Hampton Inn & Suites Santa Ana/Orange County Airport for an undisclosed amount to a private investor, acting as exclusive agents for the seller, Pacifica Hiorange LP.
The local hotel market seems to be bucking the national trend, where Ten-X Research reports that fundamentals remain weak thanks to a heavy supply pipeline in many markets and continuing competition from AirBnB, although some price gains were seen nationally in September. We sat down with Apodaca for a chat about national and local hotel cap rates and what hotel investors are looking for in the Orange County market.
GlobeSt.com: With hotels having some of the highest cap rates among CRE property sectors, according to Ten-X, how is this affecting hotel sales in Orange County?
Apodaca: Ten-X reports on national trends, and many are the properties it reports on are in the auction house and are facing challenges. The hotel market has been extremely aggressive for Orange County and all of Southern California. The Hampton Inn & Suites in Santa Ana traded in the low-6% cap range. And recently, in Northern San Diego County's Vista submarket, we ended up with a strong buyer for a hotel within 2.5 weeks after letting just a percentage of market the know it was available. In the L.A., Orange County and SD markets, any type of top-shelf select-service product is going to get a ton of attention because there's not a lot of product out there.
GlobeSt.com: What are hotel investors looking for in this market?
Apodaca: From a product standpoint, except for some institutional buys, most investors are looking at quality, select-service hotels with 120 to 125 rooms because the operating ratios are better. They don't have to look at huge food-and-beverage programs, so they're more efficient to operate. Another strong segment are boutiques or something with an edgy brand.
GlobeSt.com: Are there any areas in this market that are overbuilt?
Apodaca: If you look at where we are in the cycle, at the top of it you see a lot of accelerated development. Disneyland will see a 20% increase in room count from last year to this year and into 2018. The interesting thing there, however, is if you look at who those developers are, the majority have been there since the '70s and early '80s. They know the market. But in the other areas—Burbank, John Wayne Airport and other sectors where you do see a lot of rooms coming in—this could have a lot of impact on supply and occupancy and values. We still have room to grow, and the groups that can build are building. But those who are not builders will have to invest.
GlobeSt.com: What else should our readers know about the Orange County hotel-investment market?
Apodaca: It's a very strong market, and it will continue to be strong with what's happening near Disneyland. This will drive a leisure crowd. Southern California is considered a core market by everyone: the weather, the beaches—we have multiple guest generators in the form of our geography, business and entertainment.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
