San Francisco's Comeback: Not That Long Ago the Commercial Real Estate Market in San Francisco Was Lost in a Bank of Fog, with Few Prospects for Immediate Clearing. Today the Outlook Is Completely Different

By Leon, Hortense | Mortgage Banking, July 2006 | Go to article overview
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San Francisco's Comeback: Not That Long Ago the Commercial Real Estate Market in San Francisco Was Lost in a Bank of Fog, with Few Prospects for Immediate Clearing. Today the Outlook Is Completely Different


Leon, Hortense, Mortgage Banking


After a bruising few years following the double-whammy of the dot-com bust and the post-9/11 fallout, the San Francisco economy is recovering, although some segments more than others. [??] Among the various sectors in the economy, the hospitality industry is the biggest winner today. Tourism is San Francisco's No. 1 revenue-generating industry, and the city attracted 15.74 million visitors in 2005. That is a 4.1 percent increase over 2004, according to the San Francisco Convention & Visitors Bureau. [??] According to Conde Nast Traveler magazine's annual poll, San Francisco has been voted the No. 1 travel destination in the United States for 13 consecutive years, and for 17 of the past 18 years. [??] The tourism industry in San Francisco generated $418 million in taxes in 2005, a year when it employed 66,315 people and had an annual payroll of $1.80 billion, according to the Convention & Visitors Bureau. [??] The rest of the economy is less buoyant. In the period from 2000 to 2004 there was a "big wipe-out" in the Bay Area economy, says Stephen Levy, director of the Center for the Continuing Study of the California Economy, Palo Alto, California. Even though tourism is doing well today, it is not back at the level it was five or six years ago, he says.

Between 2000 and 2004, the San Francisco area (San Francisco, San Mateo and Marin counties) lost 145,500 jobs, according to the California Employment Development Department, Sacramento, California. From April 2005 to April 2006, the area expanded by 11,900 jobs, an approximately 1.3 percent increase, according to the California Employment Development Department.

While these numbers do not suggest a spectacular recovery, the Bay Area Council, San Francisco, a business-sponsored public policy group, reported in its quarterly confidence survey released in May that 43 percent of 512 chief executive officers and executives polled plan to hire more local workers in the next few months.

Hospitality industry takes center stage

Whatever the pace of job creation in San Francisco, the commercial real estate market shows definite signs of strength--especially the hospitality sector. According to Smith Travel Research, Hendersonville, Tennessee, the upper upscale hotel category in the San Francisco-San Mateo metropolitan statistical area (MSA) averaged an occupancy rate of 77.5 percent.

One sign of the times is that 30 percent to 40 percent of the premium hotel inventory in San Francisco has sold within about the last six months, says Rick Swig, a San Francisco-based hotel consultant.

"This is an extraordinary and probably unprecedented event," says Swig, referring to the unusual number of recent hotel sales. Plus, the prices paid for these properties were probably the highest per-room prices ever paid in San Francisco, he says.

"What this means is that there is phenomenal investor belief that San Francisco is on a significant rebound, with probably more growth potential than in other major cities in the country," says Swig.

Included among premium hotels snapped up during the latest buying binge is the 277-room Four Seasons Hotel, San Francisco, which was sold to New York-based Millennium Partners in the first week of February for $130 million, or $470,000 per room, according to Swig. "Millennium Partners, which developed the Four Seasons with Goldman Sachs' money, bought out their partner in this deal," he says.

In June, the Westin St. Francis Hotel at Union Square in San Francisco was sold for $440 million to Strategic Hotels and Resorts Inc., Chicago, for about $440,000 per room by New York-based Blackstone Real Estate Partners.

"The St. Francis sits on Union Square, the epicenter of downtown's shopping area," says Swig. The frontage of the hotel has 39,000 square feet of prime retail space, so the rent the hotel owners get from those stores inflates the value of the hotel, he says.

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San Francisco's Comeback: Not That Long Ago the Commercial Real Estate Market in San Francisco Was Lost in a Bank of Fog, with Few Prospects for Immediate Clearing. Today the Outlook Is Completely Different
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