Marlena Commercial Real Estate Specialist

03/18/2025

Hotel performance outlook for the Western US: trends and projections

An overview of the main drivers of future performance through 2027

The hotel industry in the Western U.S. is facing a mix of recovery and growth trends across major markets, with some destinations rebounding from setbacks while others continue to struggle. Markets such as Maui, Los Angeles, San Francisco, Portland and San Jose/Santa Cruz each present unique challenges and opportunities over the next two years.

Maui: Recovery in progress after wildfires-

Maui’s hospitality sector remains one of the most sought-after destinations in the U.S., but the island is still navigating recovery after the devastating August 2023 wildfires. Hotel performance has been impacted by mixed signals about the island’s readiness to welcome tourists back while respecting the community's recovery process, a slowdown in domestic leisure travel and the delayed return of international visitors from markets such as Japan and China.

The Maui market is forecast to achieve the highest compound annual growth rate (CAGR) of revenue per available room (RevPAR) of all West region markets over the next two years, at 6.5%. The high barriers to entry — including limited land availability and high construction costs — have kept new supply growth stagnant, helping sustain high rates. Ongoing rebuilding efforts, high-end tourism demand and infrastructure investments will drive the island’s recovery.

Los Angeles: Strong future growth with international demand upside-

Los Angeles remains one of the top-performing hotel markets, with strong future projections. The city will host major international events, including the 2026 FIFA World Cup, Super Bowl LXI in 2027 and the 2028 Summer Olympics, significantly boosting demand. The return of international travelers, who previously accounted for nearly 25% of hotel demand, remains a critical factor in the projected sustained recovery.

San Francisco: Long road to recovery-

San Francisco’s hotel industry struggles with low convention bookings, reduced business travel and persistent negative media coverage. The market has yet to return to 2019 performance levels, with the average daily rate (ADR) still more than 10% below pre-pandemic highs.

RevPAR is projected to grow at a 5% CAGR over the next two years, driven by a 4.2% ADR increase. However, the upside depends on the continued return of corporate travel and major conventions at Moscone Center. Recently held and/or upcoming events, including the 2025 NBA All-Star game that took place in February and next year’s Super Bowl taking place in the adjacent San Jose/Santa Cruz market, will likely contribute to increased visitation.

Portland: Struggling to overcome perception challenges-

Portland remains one of the slowest-recovering hotel markets in the U.S., with 12-month average occupancy through January at just 63% versus 72% in 2019. Public safety concerns and the delayed return of corporate travel have hindered growth.

The market is forecasted to see a RevPAR CAGR of just 0.6% through 2027, with ADR increasing at only 0.5%. However, the reversal of Measure 110 in late 2024 — a state initiative that decriminalized most unlawful possession of drugs ultimately improving downtown safety — could positively shift public perception and tourism over time.

San Jose/Santa Cruz: Benefiting from tech’s return-to-office push-

San Jose/Santa Cruz has been one of California’s strongest-performing markets in recent months, with 12-month average RevPAR through January growing by 7.9%. This has been driven by the return of corporate travel in the tech industry, particularly in San Jose Northwest and Santa Clara.

However, through 2027, the market is expected to see a modest RevPAR CAGR of 0.8%, with ADR remaining below 2019 levels. Occupancy is forecast to decline due to elevated upcoming supply. The upside relies heavily on enforcing stricter return-to-office policies from companies like Amazon, Google, Apple and Meta, which could stimulate transient business travel.

Conclusion
The Western U.S. hotel market is showing varied recovery patterns. Maui and Los Angeles are poised for growth, while San Francisco and Portland continue to face challenges. The return of international tourism, corporate travel and major events will be crucial in driving performance across these destinations.

09/18/2024

08/27/2024

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03/28/2024

You are not a drop in the ocean. You are the entire ocean in a drop -Rumi

07/25/2023

Crash? What Crash? Why Commercial Real Estate Hasn’t Gone Bust…Yet

The commercial real estate market was headed for a nosedive. It seemed so obvious.

Landlords had been struggling to fill buildings left vacant after Covid-19 forced remote work.

Some commercial builders who had taken out loans to finance projects “were just walking away, giving it back to the lender,” recalls Quincy Krosby, chief global strategist for LPL Financial.

The Federal Reserve’s inflation-fighting rate hikes, beginning in March 2022, boosted the cost of loans.

Office space hit a record-high vacancy rate of 12.9% in the first quarter of 2023, up from 12% a year earlier, according to the National Association of Realtors (NAR).

That same quarter, the sudden failure of several banks spooked the public; in the aftermath, the Fed warned of tightening credit.

Predictions of a late 2023 recession have sparked concerns that businesses would be struggling to keep up with loan payments. In recent months, according to analyst reports, short sellers have been keeping a close eye on real estate investment trusts.

So where’s the crash?

The big plunge in commercial real estate (CRE) valuations, analysts say, is more likely to be a long slide.

A CRE downturn “will be staggered,” says Krosby. Referring to banks’ preference for extending non-performing loans rather than writing them off, she says, “It’s the old ‘delay and pray.’”

Office Rents Still Rising In Many Metro Areas
Despite the vacancies, commercial real estate rents are continuing to rise, with the situation varying widely by city. According to a report by commercial real estate services company JLL, asking rents for office properties rose nationally by 0.3% between the final months of 2022 and the first quarter of this year.

But rents rose at a faster clip for fancier buildings in desirable locations, with some markets—including Charlotte, Nashville and Orange County, California—seeing record-breaking transactions, JLL said.

Banks Continue To Support Commercial Properties
Financing is not hard to come by, either. Loans for commercial real estate were at an all-time high of $2.9 trillion as of May 2023, according to the St. Louis Federal Reserve Bank, which has tracked that figure since 2004. In the past year alone, commercial real estate loans have jumped by about 10%.

Banks appear ready to handle a potential economic downturn. The Federal Reserve says all 23 banks that underwent its annual stress testing showed they could withstand a severe recession.

Those institutions hold about 20% of all banks’ office and downtown commercial real estate loans.

The stress test projected a loss rate of “roughly triple the levels reached during the 2008 financial crisis,” according to the Fed. The test results, published on June 28, revealed that “while large banks would experience heavy losses in the hypothetical scenario, they would still be able to continue lending.”

Recession Still Expected; Office Space Most Vulnerable
With or without a commercial real estate crash, many observers still expect a downturn.

Commercial real estate services and investment firm CBRE predicts that Fed interest rate hikes aimed at taming inflation will lead to a recession later this year, which will in turn result in less real estate investment and leasing.

“The drop will be gradual and bumpy,” said CBRE in its latest forecast. “The economy should stabilize by the start of 2024 but the downturn’s impact on real estate will linger until employment growth resumes.”

Banks are already beginning to charge off delinquent commercial real estate loans. The rate of charge-offs indicates the market’s direction because it means borrowers can’t afford the loans. For the first quarter of 2023, the delinquency rate is 0.95%, according to CFRA Research.

That’s below the pre-pandemic level of 1.01% in the first quarter of 2020, but “these ratios are expected to deteriorate further in the second half of 2023 with a weaker U.S. economy,” said Kenneth Leon, a research director at CFRA Research, in a June 20 report. “The office market has weakened since the pandemic.”

The Fate of Office Space Is Unclear as New Buyers Emerge
In the wake of Covid, some employees are returning to the office, but hybrid and remote work are here to stay. Companies such as JPMorgan Chase are directing employees to return to work in person, while others, like Amazon and Apple, are requiring them to be in the office only part of the time.

As a result, “the future of the traditional office space is unclear,” NAR said in an April 2023 report. So property owners are looking for creative ways to repurpose their vacant office space.

The NAR has noted that universities are showing an interest in leasing office space to attract students back to class.

Some office buildings are being turned into apartments or condominiums, though renovations are tricky and inflation has pushed up costs.

Converting office space to housing, Krosby says, doesn’t necessarily fix the problem because demand for those units hinges on employees returning to work, and wanting to live nearby.

Despite the difficulties, some buyers appear willing to step in—albeit at a discount. Even moderate demand could lessen the impact of a recession.

“I’ve had sellers come back to me that I made offers on that said I was crazy 12 months ago who are now entertaining my exact offer,” says Dutch Mendenhall, founder of RAD Diversified REIT. “Six months from now, it will start to be a real optimum time to buy office space.”

The commercial real estate market was headed for a nosedive. It seemed so obvious. Landlords had been struggling to fill buildings left vacant after Covid-19 forced remote work. Some commercial builders who had taken out loans to finance projects “were just walking away, giving it back to the

07/25/2023

Hotel-to-Apartment Conversions Gaining in Numbers

Andrea Neculae

Adaptive reuse has been mentioned as a solution to help meet increased housing demand while giving empty office buildings a second chance at life. A report from RentCafe indicated that 2019 and 2020 were peak years for adaptive reuse from offices to apartments. However, “the number of projects converted in 2021 and 2022 didn’t match the initial excitement,” the report said.

Here’s the surprise: adaptive reuse involving hotel-to-apartment conversions did well in 2022, making up 29% of the total inventory nationwide.

“One thing about adaptive reuse is that it’s not a cornucopia of abandoned buildings, just waiting for a transformation,” RentCafe’s Andrea Neculae told Connect CRE. “It’s highly dependent on available stock and how compatible that stock is with conversion.”

The Ongoing Office-to-Apartment Challenges

Offices buildings have multiple challenges with adaptive reuse. According to Neculae, who authored the RentCafe report, there’s been a great deal of talk about incentives and tax reductions to aid developers in revitalizing downtown areas. “The truth is that the office market seems to be stuck in a limbo of indecisiveness,” she said. Investors continue to take a wait-and-see approach as they await the impact of back-to-work mandates and the anticipated wave of distress. Then there is the cost of conversion.

“So, while on the surface, a high demand for housing combined with a low office vacancy rate may seem like the ripe conditions for converting into other types of assets, there are many hindrances to be considered: complying with housing requirements, making sure structural changes adhere to the cities’ regulations and accommodating multiple units with sewage and other issues,” Neculae said.

Enter the Hotels

The report indicated that the decline of previous hotel markets is the catalyst driving the current wave of hotel-to-apartment conversions. “Hotels typically already have a layout that is similar to residential buildings, with individual rooms, bathrooms and sometimes even small kitchen areas,” Neculae explained. “This reduces the need for extensive structural changes when converting.”

She said many hotel buildings are also already zoned for residential use, leading to a more straightforward transformation.”

The added plus is that this conversion type can deliver more affordable housing units. “In the last three years, 54% of hotel conversions have been repurposed for low- and middle-income renters,” Neculae said.

The Outlook

The report indicated that the future of adaptive reuse projects appears promising, with a potential 63% increase in upcoming projects. At this time, 122,000 apartments are undergoing conversion. Office is leading the way, with 45,000 apartments anticipated. “When it comes to future projects, office-to-apartments remain the preferred type of conversion, making up 37% of the total units expected to come online through adaptive reuse in the next years,” Neculae commented. “Only a quarter of the future office conversions are currently under construction, with the vast majority being in planned or prospective phases.

Adaptive reuse has been mentioned as a solution to help meet increased housing demand while giving empty office buildings a second chance at life. A report from RentCafe indicated that 2019 and 2020 were peak years for adaptive reuse from offices to apartments. However, “the number of projects con...