San Francisco’s ‘Vertigo’ Hotels Miss Boom as Demand Shifts From Nob Hill

San Francisco’s Nob Hill, the posh neighborhood overlooking downtown and the bay, may continue to be left out of a thriving market for hotel sales in the city as investors focus on the area surrounding the convention center.

Buyers paid a record $780 million for hotels in the 12 months through June, a 75 percent increase from the previous year, according to broker Atlas Hospitality Group, whose data go back to 1991. Operating costs won’t grow as fast as the amounts lodging companies can charge guests, so future increases in room rates will go primarily to the bottom line of owners and operators, said Tom Callahan, president of PKF Consulting USA.

“San Francisco has never been this hot, ever,” Alan Reay, president of Irvine, California-based Atlas Hospitality, said in a telephone interview. “You have a low cost of capital, pent-up demand and properties that wouldn’t normally come to market.”

The city’s revenue per available room, a measure of rates and occupancy that is the most important metric for hotel investors, is projected to rise 15 percent this year, more than double the U.S. average, according to San Francisco-based PKF. No new hotels are planned for at least five years, capping the supply at about 33,000 rooms, Callahan said.

Business at the Moscone Center convention complex, which has helped fill rooms in the South of Market area, will increase conference-related hotel bookings by 7.5 percent this year, the first annual gain since 2008, according to a forecast by the San Francisco Travel Association.

Where Sinatra Sang

Hotel buyers are favoring the area over Nob Hill, where Frank Sinatra and Ella Fitzgerald sang in nightclubs and Hitchcock filmed scenes for “Vertigo.” It has been a favored locale for the wealthy since a cable car line was installed on California Street in 1873, according to Kevin Starr, California’s former state librarian.

“Nob Hill is almost like an island up there,” Callahan said. “It’s got a great name, but if you are a traveling person you want to be proximate to South of Market, the convention center, the business community.”

San Francisco’s hotel-investment boom has been evident in the sales of Union Square’s JW Marriott for $96 million in February; the Westin in the South of Market area for $172 million in March; and the Financial District’s Mandarin Oriental for $63 million in May, the most expensive transaction on a per- room basis, according to Atlas Hospitality.

The sales surge may be blunted by the 13 percent slide in the Standard & Poor’s 500 Index since July 22, even with expected increases in San Francisco’s overall daily room rates and occupancies, said Michael Depatie, chief executive officer of Kimpton Hotel & Restaurant Group LLC.

‘Things Will Change’

“It’s highly likely things will change,” said Depatie, whose San Francisco-based company sold the Monaco San Francisco in Union Square in September of last year and the Argonaut in Fisherman’s Wharf in February. Those two, along with the Sir Francis Drake in Union Square, which Kimpton operates, sold for a combined $242.5 million. “Demand is linked to the economy.”

Real estate investment trusts, among the most active buyers of San Francisco properties, may have used up their funds set aside for acquisitions and now face retrenchment with share prices down, said David Loeb, hotel analyst at Milwaukee-based wealth manager Robert W. Baird & Co.

Chesapeake Lodging Trust (CHSP), based in Annapolis, Maryland, purchased Le Meridien San Francisco in the Financial District for $143 million in December and the Hotel Adagio in Union Square for $42.2 million in July, while Pebblebrook Hotel Trust (PEB), in Bethesda, Maryland, bought the Argonaut for $84 million and the Sir Francis Drake for $90 million, according to PKF.

Decisions Delayed

Would-be buyers will delay decisions until after September at the earliest to see how much companies intend to spend on year-end travel, according to Loeb.

“Why not wait to buy until you know the economic forecast?” he said. “If it’s your last chance, you want to make sure it’s a home run.”

While properties in other parts of the city are selling, Nob Hill hotels remain on the market. Among them are the InterContinental Mark Hopkins, whose Top o’ the Mark bar is off limits to Jimmy Stewart’s “Vertigo” character because of its precipitous view, and the Fairmont, where Tony Bennett publicly debuted his signature song “I Left My Heart in San Francisco” 50 years ago in the hotel’s Venetian Room.

‘Exudes the Poetry’

“It exudes the poetry of urban life, like Sloane Square in London, the Rue du Bac in Paris, or any comparable area,” Starr, the former state librarian, said of Nob Hill. He has a home in San Francisco and is now a history professor at the University of Southern California in Los Angeles.

Even with its storied past, Nob Hill is underperforming the rest of San Francisco. In July, the hotel occupancy rate was 92 percent in Fisherman’s Wharf, 90 percent in South of Market, 89 percent in Union Square and 86 percent in Nob Hill, according to Smith Travel Research Inc. in Hendersonville, Tennessee.

Citywide, the rate was 79 percent this year through July, approaching the 81 percent record set in the like period of 2000. Revenue per available room averaged $129.68, the highest for January through July since Smith Travel began tracking the industry in 1987.

South of Market had the highest average nightly revenue per available room for the first seven months of the year at $147.06, followed by Nob Hill at $144.69, Union Square at $123.45 and Fisherman’s Wharf at $116.68, according to Smith Travel.

Accelerated Momentum

“The momentum toward South of Market was already going on before I came on board five years ago, but it’s accelerated within the last couple of years,” said Doug Housley, general manager of the Four Seasons Hotel on Market Street, which opened in 2001 as the district, also known as SOMA, was taking off.

A rough part of town for most of the 20th century, South of Market was transformed during the mid-1990s technology boom with rediscovered streets, rebuilt warehouses and a new Third Street home for the San Francisco Museum of Modern Art, which led more arts groups to move to the area. The Giants baseball stadium followed in 2000, and a new convention center wing opened in 2003, adding 50 percent more space and increased foot traffic.

“The area around the convention center has become this hub of activity, which is continuing to grow and definitely has had an impact on hotels on the north side,” said Lew Wolff, co- founder of Los Angeles-based Maritz, Wolff & Co., which owns the Fairmont with Saudi Prince Alwaleed bin Talal.

Condo Conversion Stalled

Wolff’s attempt to convert some of the 591 guest rooms to condominiums stalled when city officials failed to act on his request before a deadline shut the door on all condo conversions. Wolff blamed the defeat on opposition from hotel unions, who feared that eliminating hotel rooms would result in fewer jobs.

“San Francisco has the highest union costs relative to achievable room rates, and that could be a concern to somebody interested in buying a hotel here,” Wolff said.

The Fairmont, which opened in 1907 and was featured in the 1980s TV series “Hotel,” is located on the cable car line and an “icon of the city,” said Reay of Atlas Hospitality. Also for sale on the line are the Huntington Hotel, owned by the Cope family, and Stanford Court Renaissance, operated by Marriott International Inc.

Even U.S. presidents seem to be part of the shift away from the stately lodgings that, as the Bennett tune says, reside “high on a hill.” Bill Clinton often stayed at the Fairmont during visits to the Bay Area, while President Barack Obama has twice opted for South of Market’s InterContinental San Francisco on Howard Street.

“The desirability of Nob Hill is down,” said Callahan of PKF. “It hasn’t fallen off the edge of the world for someone who remembers the heyday. But for young people, not a chance.”

To contact the reporters on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net; Nadja Brandt in Los Angeles at nbrandt@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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