In once-hot hospitality destinations like California, a great divide has cropped up between the most desirable and most troubled markets.

Through the first half of 2010, transactions in Northern California were up almost 62% from a year ago, according to Atlas Hospitality Group in Irvine. Dollar volume was up 186%. In Southern California, transactions rose 56% and dollar volume was up 158%.

Leading transactions in the first half included the sales of the Four Seasons in San Francisco for $109.1 million and the Courtyard Mission Valley in San Diego for $43 million.

But not every market shared in the hotel sales gains. While Los Angeles County hotel transactions soared 350% in the first half and rose 68% in San Diego County, deals were actually down 50% in Riverside County, part of the Inland Empire.

Deals were down 99% in Sacramento County, where the most expensive sale this year has been the 22-room Hotel del Rio in Isleton at $336,000.

According to Atlas, 478 California hotels are currently in default or in foreclosure, up 132% over the total at mid-year in 2009. Big properties like the Heritage Hotel in Mendocino and the elite Quail Lodge in Carmel have gone completely dark. So has the Borrego Springs Ranch Resort in Borrego Springs, owned by GH Capital and closed since January.

Small towns, small pockets

“We're in a situation in California where demand for transactions in Class-A markets like Los Angeles and San Francisco is very high,” says Alan Reay, president of Atlas Hospitality. “In Class-B and Class-C markets there isn't much demand for hotel assets at all. Deals are very tough to finance in smaller towns now.”

John Stueber, president and owner of Summit Capital in Carlsbad, a finance brokerage, believes that investors may be poised to discover smaller towns soon. His firm recently arranged financing for a $9.6 million Marriott TownePlace Suites in the little village of Elko, Nev.

“That deal would have been pretty tough six months ago. But the lending situation is getting marginally better every day,” says Stueber. As he looks around at the damaged assets in small towns in California, he predicts a flood of fresh investment in hotel assets before long.

“This is probably one of the biggest buying opportunities of my career, possibly of my lifetime,” says Stueber. “Everybody agrees we've passed the bottom. Now is the time to be putting sales contracts together.”