Since it opened in 1987, San Francisco’s Pan Pacific Hotel has been known as a four-star hostelry that attracts business and leisure travelers interested in first-class service and a central location, a block from Union Square. The Pan Pacific also provides a short history course in the shifting fortunes of the hotel business.
John Portman, a glitzy icon of 1970s and ‘80s commercial architecture, designed and developed the hotel. His firm, Portman Holdings, sold the Pan Pacific to a Japanese conglomerate, Tokyu Corp., for $104 million, or more than $315,000 a room, in 1991 -- just before investors understood the full extent of the Japanese economic collapse. Looking to raise cash for its other businesses, Tokyu unloaded the hotel in August to a partnership of Goldman, Sachs & Co.'s Whitehall Street Real Estate Funds, an opportunity fund; and Oxford Lodging Advisory & Investment Group. The reported purchase price: $45 million, or $137,000 a room.
The steep decline in the Pan Pacific’s valuation largely reflects the overall industry experience. According to Hospitality Research Group, an affiliate of Atlanta-based PKF Consulting, the average price per room for full-service hotel sales fell from $115,705 at the most recent market peak, in 1998, to $85,529 last year.
The Pan Pacific deal is one of several recent hotel acquisitions engineered by opportunity funds, which typically use high leverage and drive a hard bargain on price. In July the Whitehall and Oxford team, in partnership with Dallas-based Highgate Holdings, purchased the 722-room Metropolitan Hotel in midtown Manhattan for $100 million -- the first sign of opportunity fund activity in recent years. Another leading opportunity fund sponsor, Greenwich, Connecticut based Starwood Capital Group, is set to close on the Renaissance Wailea Beach Resort on the Hawaiian island of Maui for a price said to be about $85 million.
Says Robert Stiles, head of the San Francisco office of New Yorkbased Sonnenblick-Goldman Co., a real estate investment banking firm, “It should be a great time to buy, because the hotel industry is on its knees.”
For full-service hotels in major U.S. cities, revenue per available room, a standard industry benchmark, declined from $85.72 a day in 2000 to $71.88 in 2002 and is projected to drop to $71.48 this year as business travel remains subdued.
The depressed state of the industry is starting to wear down many owners’ deep-seated resistance to selling. Says Robert Eaton, U.S. hotel specialist at real estate services firm Colliers International, who acted as the broker on the sale of the Pan Pacific, “People are beginning to say, ‘I’ve accepted that my property is only worth X, but I still need to sell.’”
Opportunistic buyers like Whitehall tend to restrict themselves to the most complicated transactions, where they can utilize their expertise. The Pan Pacific, located in one of the country’s toughest real estate markets -- the dot-com bust and the falloff in Asian travel have taken their toll -- presents two particular headaches. It is subject to both a ground lease (the underlying property belongs to an adjoining landowner that regains title when the 80-year lease expires in 2083) and an ongoing management contract with Tokyu subsidiary Pan Pacific Hotels and Resorts, a prominent Asian brand that is little known in North America.
Starwood also seeks out complicated deals: It’s planning to buy the Renaissance Wailea from Japan’s Shinwa Golf Group, which is being forced to sell several of its Hawaiian properties because its loans are in default. Worse, the loans were from the collapsed Nippon Credit Bank, now in the hands of the Resolution and Collection Corp., a government agency.
