By Erik Ransdell & Mike Annunziata
Strands Realty Group February 19, 2025
The California hospitality market is at a turning point. Rising interest rates, shifts in travel demand, and financial pressures have caused a surge in distressed hotel assets. While this situation may seem like a warning sign to some, history shows that downturns in the hotel market often create once-in-a-decade investment opportunities. Investors, developers, and hotel operators who can navigate the challenges ahead have a chance to acquire prime assets at a fraction of their former value, reposition struggling hotels, and bring new life to key hospitality markets.
In our last newsletter, we highlighted the financial struggles of Parc 55 and Hilton San Francisco Union Square, which were surrendered to their lender in mid-2023. But San Francisco isn't the only city experiencing distress in its hotel market. Across California, from Los Angeles to San Diego, hotel owners are being forced to sell properties at steep discounts due to rising debt costs and weakened corporate travel demand.
Despite the challenges, there’s reason for optimism. Investors are beginning to identify undervalued assets with strong turnaround potential, and new financing options are making it possible to acquire and reposition distressed hotels in ways that were not possible just a year ago. The key to success lies in understanding the market, identifying the right properties, and executing a strategic repositioning plan.
The Growing Number of Distressed Hotels in California
Distressed hotel sales are on the rise, but the reasons behind these financial struggles vary across markets. While high-end resort markets like Napa Valley, Palm Springs, and Santa Barbara continue to see strong demand from leisure travelers, urban hotels in Los Angeles, San Francisco, and San Diego are dealing with mounting financial pressure.
A significant factor in the current wave of distressed hotel assets is high interest rates. Many hotels were financed at historically low rates between 2019 and 2022, but as rates have risen, owners now face ballooning debt payments. This is making it difficult for many properties to refinance, leading to an uptick in loan defaults and forced sales.
According to The Wall Street Journal, more than 1,500 hotels with CMBS loans are facing potential default in 2025 as financing costs continue to rise. Many of these hotels rely heavily on corporate travel and conventions, which have yet to fully recover in major business hubs like Los Angeles and San Francisco.
However, even within the distressed market, there are bright spots. Some investors are already seizing opportunities to acquire underperforming hotels at deep discounts, secure favorable financing, and transform properties to meet evolving traveler demands.
Case Studies: Successful Hotel Transformations in California
Not all distressed hotels remain in distress. Some properties are already experiencing major turnarounds due to strategic acquisitions and repositioning efforts. Here are two recent examples of hotels that have successfully rebounded from financial struggles:
1. The Westin Bonaventure, Los Angeles
The Westin Bonaventure in Downtown Los Angeles, one of the city's most recognizable hotels, faced serious financial struggles following the pandemic. Occupancy rates dropped dramatically, and corporate travel demand remained weak, putting pressure on the hotel's ability to meet debt obligations.
Rather than default, the hotel secured a renegotiated loan package and implemented a revenue diversification strategy, including:
Partnering with film and television production companies to use the hotel for on-location shoots.
Expanding event and conference space offerings to attract more local business events.
Creating a new rooftop bar and dining experience to bring in more revenue from non-hotel guests.
By making these strategic changes, the Westin Bonaventure has seen occupancy rates rebound by nearly 20% over the past year, making it one of Los Angeles' strongest comeback stories in the hospitality sector.
2. Hotel del Coronado, San Diego
The Hotel del Coronado, a legendary beachfront resort in San Diego, faced financial challenges in recent years due to rising labor costs, deferred maintenance, and a decline in group bookings. Rather than let the property fall into distress, ownership secured private equity investment to fund a multi-phase renovation, modernizing the hotel while preserving its historic charm.
Some of the changes included:
A $400 million renovation to upgrade guest rooms, restaurants, and meeting spaces.
The introduction of luxury residential units as part of an expanded business model.
A renewed focus on wellness tourism, offering spa retreats, fitness programs, and mindfulness experiences.
These strategic investments have allowed the Hotel del Coronado to recover financially, with room rates and occupancy surpassing pre-pandemic levels. The property has now become a blueprint for how luxury hotels can navigate financial difficulties while staying competitive in a changing market.
Strategies for Investing in Distressed Hotels
For investors looking to capitalize on the current market, acquiring distressed hotels requires a well-planned strategy. Here are some of the best approaches:
1. Target Pre-Foreclosure SalesHotel owners who are struggling with loan payments but have not yet defaulted may be willing to sell at a discount to avoid foreclosure. Approaching these owners with off-market offers can be an effective way to secure prime assets at below-market prices.
2. Buy from Lenders and Special ServicersWhen hotels default on loans, lenders often take control and seek to sell the property quickly. Special servicers managing CMBS loans are particularly motivated to offload distressed assets, creating opportunities for investors to purchase properties at steep discounts.
3. Focus on Hotel RepositioningNot all distressed hotels should remain traditional hotels. Some may be better suited for:
Extended stay conversions, catering to long-term travelers and digital nomads.
Residential or senior living conversions, particularly in high-demand housing markets.
Boutique lifestyle rebrands, which align with the trend of travelers seeking unique, high-end experiences.
4. Partner with Experienced Hotel OperatorsDistressed hotels require expert management to turn them around. Investors without hospitality experience should consider partnering with hotel operators who have a track record of success in repositioning underperforming assets.
Conclusion: A Market Filled with Opportunity
While the headlines often focus on the challenges facing California's hotel industry, the reality is that the current market presents a wealth of opportunity for those who know where to look. With billions of dollars in hotel loans maturing in 2025, the next 12 to 18 months will likely see a continued increase in distressed hotel sales.
However, as we've seen in cases like The Westin Bonaventure and Hotel del Coronado, properties that undergo strategic repositioning can not only recover but thrive in a changing market. The key is having a clear investment strategy, strong financing partners, and a vision for what today’s travelers demand.
For investors who act decisively, the distressed hotel market in California could present some of the best buying opportunities in over a decade.
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