Strong Interest from Overseas and Domestic Capital Projected to Spur Growing Number of U.S. Hotel Sales in Secondary Markets
Robust demand, improving room rental performance and a massive supply of capital from REITs and private equity sources are expected to provide the basis for another year of strong investment in hotel properties in 2014.
An abundance of equity and debt capital should drive a 5% to 10% increase in global hotel transaction volumes in 2014, according to Jones Lang LaSalle’s newly released Hotel Investment Outlook.
Not that 2013 was a slouch by any means. U.S. hotel sales rose to $28 billion last year -- a whopping 42% increase from 2012 and the strongest hospitality investment sales volume since 2007’s $42.9 billion, according to preliminary CoStar year-end sales data.
Arthur Adler, Americas CEO and managing director of Jones Lang LaSalle’s Hotels and Hospitality Group, said the CRE services firm’s bullish forecast is based on several key drivers of transaction volume, such as the availability and cost of equity and debt capital, hotel operating fundamentals, and hotel REIT share pricing. Adler said those factors are expected to skew hotel investment activity toward a market environment for more hotel trading rather than long-term holding of assets.
"This is a good time to be a hotel investor and owner as we expect several more years of strong and growing fundamentals," Adler said. "Hotel fundamentals will continue to be driven by growing business and leisure travel in major gateway markets, as well as in secondary markets and resort destinations throughout the Americas. We are optimistic about the near- and long-term prospects for the industry."
Better fundamentals include increased occupancy and stronger pricing power. In the U.S., revenue per available room (RevPAR) is expected to improve by a strong clip in 2014, creating opportunities for both buyers and sellers, Adler added.
Also bullish on hotels is PKF Hospitality Research, LLC, which is forecasting very strong gains in revenues and profits for the lodging industry in 2014 and 2015, including a 6.6% increase in U.S. revenue per available room (RevPAR) in 2014 followed by an even stronger 7.5% in 2015.
Ernst & Young also gives the sector a favorable reading, seeing robust lodging demand along with several years of low supply due to curtailed development activity resulting in healthy gains in average daily rates (ADR). That, in turn, will prompt higher per-key prices for hotel acquisitions, according to EY’s Global Hospitality Insight for 2014.
Moreover, hotel companies are finding greater access to a variety of debt and equity capital from both public and private sources to fund their expansion, according to the report by EY Global Real Estate Leader Howard Roth and Hospitality and Leisure Leader Michael Fishbin. Investors have focused most recently on select-service hotels, which tend to have lower purchase prices and higher operating margins than other market segments.
The strong projected performance is attracting interest from all types of investors, led by private equity funds and REITs, which are expected to comprise two-thirds of total hotel acquisitions this year, according to JLL.
Funds with purchase power of up to $10 billion (including leverage) are scouring markets for high-quality, branded assets and small portfolios in core markets, including acquisitions of single assets, large select-service portfolios, and mergers and acquisitions.
A variety of other capital sources are also re-entering the hotel space, including opportunistic lenders providing financing for developers to re-launch stalled projects and provide capital infusions for distressed resorts, adds Mathew Comfort, managing director of JLL’s Hotel Investment Banking platform.
"Hotels will remain a targeted asset class for lenders as they can offer high yields relative to other real estate," Comfort said.
Offshore investment in the U.S. is expected to increase 50% to $3 billion, led by a growing number of Middle East and Asian conglomerates, family businesses and state-owned enterprises competing to buy hotel properties in top U.S. markets such as Los Angeles, New York and San Francisco.
In addition, other foreign investors seeking to diversify their portfolios and invest in prime assets in stable economies are combing the same gateway markets for hotels with strong fundamentals and secure cash flow, said John Strauss, managing director of JLL’s Hotels & Hospitality Group.
"Last year, we saw several large transactions on the West Coast from Chinese investors, and there will be more big moves from foreign capital sources this year," Strauss said.
As the economy strengthens and leisure travel picks up, foreign buyers are expected to widen their investment radar to include resort transactions in the U.S. as well as Mexican destinations such as Cancun and Los Cabos, according to JLL.
As they have in most other commercial property types, investors have widened their search beyond the best core hotel properties in the top markets, reports JLL. Secondary asset types, such as resorts, and hotel properties of all types in second-tier markets such as Atlanta, Houston and New Orleans, are leading the uptick in sales activity. Resort property sales doubled over the prior year.
For example, resort construction is returning to Las Vegas after years of post-recession decline in the tourism industry. A Malaysia-based gaming company purchased an 87-acre site for $350 million, with plans to build a 3,500-room resort with a 175,000-square-foot casino.