Montage Resort
Luxury hotels such as the Montage Laguna Beach that endured the downturn are now thriving, making them appealing targets for investors. The resort sold last month. (Allen J. Schaben / Los Angeles Times)

By Roger Vincent
February 15, 2015

Pampered guests at the five-star Montage Laguna Beach resort can swim in a lap pool overlooking the Pacific, dine on caviar and sleep on goose-down pillows to a lullaby of crashing waves.

The rooms typically go for $800 a night and up, but the hotel has no problem filling them, a stark contrast from just a few years ago, when the Great Recession kept most people away.

Eager investors are taking notice. Late last month, the Laguna Beach landmark sold for $360 million, a record of more than $1.4 million per room, underscoring the rush to buy hotels, especially in the thriving luxury market serving wealthy business and leisure travelers.

Fueled by rising occupancy and room rates, investors bought 399 California hotels for a total of $5.1 billion in 2014, a nearly threefold increase from 2009, when 92 hotels sold for a combined value of nearly $1.8 billion, according to research by Atlas Hospitality, an Irvine hotel industry consulting firm.

“As much as we had a perfect storm in 2009, we are at the opposite end of the spectrum now,” said Alan Reay, president of Atlas. “It’s a very strong sellers market.” Only hotels in Hawaii and New York have traded for more per room, he said.

Hotels, especially deluxe inns like the Montage, were among the first businesses to be brutalized by the epic economic downturn. Leisure travelers stayed home and business people grew loath to be seen cavorting in expensive resorts when so many others were in financial turmoil.

Business was so bad by 2009 that there was even a name for the backlash against lavish travel and entertainment spending by corporations: “the AIG effect.”

Insurance company American International Group Inc. took a public drubbing after spending $443,000 to treat top employees at the St. Regis Monarch Beach resort in Dana Point just days after accepting an $85-billion federal bailout. Other companies quickly canceled group outings to save money and to avoid looking out of touch during a time of widespread hardship.

Now, the AIG effect appears to have all but disappeared as room rates surpass $1,000 a night at elite California hotels and the properties are sought by investors willing to pay top dollar to acquire them.

The $1.44 million per room that the sellers of the Montage received “shattered the price barrier for California hotels by a wide margin,” Reay said. The hotel, which was owned by a Redwood City investment firm funded by EBay founder Pierre Omidyar, was sold to Chicago real estate investment trust Strategic Hotels & Resorts. It has a five-star rating from Forbes Travel Guide.

Among the biggest sales last year were the St. Regis Monarch Beach for $317 million to a Denver private equity firm, the Los Angeles Airport Marriott for $160 million to Chinese investors, and the Miramonte Resort & Spa in Indian Wells for $26 million to a Boston private equity firm.

Real estate investment trusts that trade on Wall Street and private equity firms that pool money from multiple investors are borrowing money at historically low rates to do deals, said John Strauss, managing director of hotels for real estate brokerage JLL.

Overseas investors are also competing for prominent properties in urban centers and resorts in the West, he said.

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