As Orange County loses its visitor pool, a base that averages north of 4 million tourists per month, it’s also losing a pool of investors as dealmaking comes to a halt.
Market uncertainty has prompted hotel investors to back off, and market watchers tell the Business Journal that one blockbuster area deal is likely to be postponed, if not canceled altogether.
As the Business Journal reported last August, a South Korean financial services group was in the process of acquiring two of Orange County’s poshest coastal resorts as part of a larger portfolio deal.
Mirae Asset Financial Group, which has more than $400 billion of assets under management, was reported to be near a deal to buy a collection of 15 upscale hotels in the U.S. that are being unloaded by Chinese insurer Anbang Insurance Group.
Anbang’s portfolio includes the Montage Laguna Beach and Ritz-Carlton Laguna Niguel; it bought them in September 2016 as part of a $5.5 billion portfolio buy from Blackstone Group LP.
The two resorts were expected to trade for at least $900 million on a combined basis.
The 260-room Montage was pegged to sell between $1.5 million and $1.7 million per room—equating to a price in the $420 million neighborhood, while the 393-room Ritz was said to worth about $535 million based on $1.35 million to $1.45 million per key.
Now, as financing for hotels becomes next to impossible, and the coronavirus pandemic makes it difficult to properly appraise property values, that deal could well be nixed, sources tell the Business Journal.
“The sale was under contract prior to all of this, and I seriously doubt it will close now,” said Alan Reay, founder of Irvine hotel brokerage and research firm Atlas Hospitality Group.
“In an absolute best case scenario, the deal is postponed for several months, and it will close at a lower price.”
Sales Halt
The Mirae-Anbang deal, expected to have a price tag in the $5.8 billion range, was already said to be in flux prior to the COVID-19 outbreak.
According to news reports, Goldman Sachs and other lenders were struggling to secure nearly $4 billion in commercial mortgage-backed securities for the transaction, and were attempting to line up bridge financing to keep the sale alive.
Market turmoil of late has made the shaky deal even more unstable, as the virus’ effect on property values remains to be seen.
“Transaction volume has completely plummeted. No one is going to want to buy hotels right now, mainly because it will be impossible to tell what the values of these hotels are, and lenders aren’t going to want to finance deals,” Reay said.
New Low in 2020
Typically, between 300 and 350 hotels trade in California per year. The state saw an all-time low of 72 hotel sales in 2009, amid the Great Recession.
“I don’t think we will even get close to 72 sales this year,” said Reay, whose firm tracks transaction and construction activity on state and county levels.
“This is unprecedented. It is going to take 12 to 24 months to figure out what a normal year will look like,” he said.
Last year, 297 hotels sold across the state, up 6% from 2018. Dollar volume was up 7.4%.
Eighteen of those sales were in Orange County, up from 16 the year prior, and local dollar volume surged 188%.
Ohana Real Estate Investors’ $477 million purchase of the 400-room Monarch Beach Resort, which closed in November, led transactions both in the county and state.
On a per-room basis, it was the second-highest sale in California last year at $1.2 million per key.
Safe Haven
How quickly the market can return to normal transaction activity will depend on financing that is available, and how stringent lenders will be with borrowers, Reay noted.
Looking to the bright side, Reay said California as a statewide economy will fare better than other destinations.
“The state is a relative safe haven for investments. Long term, we will be fine, and we will bounce back.”
