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Hotel Buyers To Play Catch Up with Rest of CRE Investment Market in 2013

REITs, Institutional Buyer Activity Increases in Past Few Weeks
January 16, 2013
While it currently looks like hotels will be the only sector of commercial real estate that didn't see a year-over-year increase in sales transactions in 2012, the prospects for 2013 are looking up.

As of this week, CoStar COMPs research shows that total hospitality transactions had a down year in 2012, a 16% decline from 2011 -- $18.3 billion in sales in 2012 vs. $21.7 billion in 2011. CoStar COMPs research on total transactions won’t be completed for another few weeks, but at this point all other property type sales are already well outpacing 2011 numbers.

However, as the investment recovery landscape continues to expand, a strong bench of buyer groups are showing more interest in acquiring lodging assets, according to initial results from Jones Lang LaSalle’s annual Hotel Investment Outlook report, to be released in later this month.

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“Inadvertent hotel owners, like banks and receivers, will continue to drive a significant share of hotel product to market. We also expect institutional investors to liquidate select non-core assets that will create opportunities for value-add investors,” said Mark Wynne-Smith, Global CEO of Jones Lang LaSalle’s Hotels & Hospitality Group.

While buyers have indicated a greater intent to purchase in 2013, JLL's Wynne-Smith said the global economic uncertainty will keep a ceiling on transaction volumes.

Of the active players, private equity investors will continue to lead the pack, being in the favorable position of achieving opportunistic returns through their significant buying power and risk tolerance. REITs, net buyers throughout 2012, will continue to make headline acquisitions of core properties in gateway markets.

Transaction levels, capital values, hotel trading fundamentals and rents are generally improving against a backdrop of downward revisions to economic growth, JLL noted. However, given the amount of stimulus that continues to be injected into the world economy, economic growth rates in the coming years are expected to slowly improve.

Fitch Ratings is also projecting that the lodging industry will continue to outperform the broader economy in 2013.

One reason Fitch expects lodging transaction volume to be fairly healthy in 2013 is because it is still cheaper to buy than to build. The lodging upcycle has increased investment demand in hotel assets, but property-level profit margins have not yet reached a level that will lead to a significant build-out of new supply. Fitch expects hotel concentrations in new CMBS issuance should continue to increase.

Lodging C-Corps, such as Starwood, are continuing their strategy to become more asset-light and sell hotels while still keeping them in their portfolio as managed or franchised hotels, Fitch projected. Other lodging REITs, such as FelCor, will continue to look for opportunities to divest noncore assets.

Institutional investors and hotel REITs stepped up their acquisition activity late in 2012 and early this year and are also going to Wall Street to raise money for deals this year.

Omni Hotels & Resorts acquired The Westin Hotel in Providence, RI, from The Procaccianti Group for $170 million in late 2012. Located in historic downtown Providence, the 564-room hotel will be part of Omni’s expanding Convention Collection of hotels.

LaSalle Hotel Properties acquired a majority interest in The Liberty Hotel in Boston, MA, through a joint venture with the original developer and co-owner, an entity controlled by Dick Friedman of Carpenter & Co. The total value of the transaction was also $170 million. The 298-room full service, luxury hotel is in the Beacon Hill neighborhood of Boston.

Carey Watermark Investors purchased the 317-room Courtyard San Diego Mission Valley/Hotel Circle for $85 million.

Loews Hotels & Resorts and MetLife today formed a joint venture in the ownership of the Loews Hollywood Hotel, a 632-room hotel in Los Angeles, purchased by Loews Hotels earlier in 2012 for $169 million. The purchase is part of Loews’ strategy to add substantially to bits portfolio of hotels over the next five years. Loews Hotels continues to aggressively seek hotel additions in gateway cities and resort destinations and expects to announce additional new Loews properties in the coming months.

Hotel REITs Summit Hotel Properties Inc. and Chatham Lodging Trust are both going to market this month to raise money to fund their investment activity.

Austin-based Summit Hotel Properties Inc. is looking to raise more than $130 million to fund the cash purchase price for the acquisition of a three-hotel portfolio of unencumbered Hyatt Place hotels (total of 426 rooms; located in Orlando (two hotels) and Chicago, a 93-room Holiday Inn Express hotel in Minneapolis and a 97-room Hilton Garden Inn hotel in Minneapolis. The money will also fund Summit’s initial capital contribution to a proposed joint venture for the acquisition, renovation and ownership of a 252-room Holiday Inn Express in San Francisco.

Palm Beach-based Chatham Lodging Trust is looking to raise more than $62 million to repay debt incurred in its recent acquisition of the Hampton Inn Portland Downtown - Waterfront in Portland, ME.

Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.

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