GLOBAL REPORT—Knocked around during the global downturn, the luxury/resort hotel sector is beginning to get back on its feet.
Year-to-date through August, the resort sector accounted for 18.4% of total investment transaction volume in the hotel sector, according to data compiled by Jones Lang LaSalle’s Hotels & Hospitality Group. The approximately $2.5-billion of transaction volume in the sector represents the highest amount since 2007 and is triple the prior-year period.
Optimism over the prospects for the global resort/luxury sector is one factor driving the renewed interest, sources said.
“Investment in the resort sector typically occurs late in the recovery cycle with gateway and urban markets receiving the early pressure from investors,” Gregory Rumpel, a managing director with JLL’s Hotels & Hospitality Group, said in an email. “Since the recession, people are more financially stable and feel comfortable taking a vacation, and the uptick in travel has caught the attention of investors.”
Through mid-October in the United States, a total of 31 luxury hotels representing $3.6 billion in deal volume closed, according to STR Analytics, sister company of Hotel News Now. During full-year 2012, there were 30 luxury deals, representing deal volume of $3.4 billion.
While there have been some deals struck—such as Omni Hotels & Resort’s purchase of five resort properties from KSL Capital Partners earlier this year—there is still room for transaction activity to grow, said Steve Hennis, director at STR Analytics.
“Many resort destinations, particularly in Arizona, Florida, and southern California, are still lagging the lodging industry recovery. For this reason, transactions involving resorts have been sporadic,” he wrote in an email, adding that deal flow should increase as metrics in those markets improve.
Innisfree Hotels is one such company that is out kicking tires.
“I just think you’ve seen a nice, gradual increase (in the economy) and people are traveling a little bit more on vacation and staying a little bit longer,” said Brooks Moore, CFO at Innisfree.
Moore said fears of another downturn occurring anytime soon are being dismissed by travelers who are looking to reinstate trips to luxury destinations.
He said the company, an acquirer and developer of hotel properties with 18 hotels in its portfolio that the company either owns or third-party manages, has been looking at deals primarily in the Key West region of Florida. He said the company is underwriting two potential deals.
“And that’s without looking very hard,” he said, declining to provide details about the deals.
The hottest regions for luxury investment are south Florida, Mexico and the Caribbean, Rumpel said.
Carey Watermark Investors has targeted the south Florida market. The company late last month acquired the 177-room Hawks Cay Resort in the Florida Keys. The private real estate investment trust’s total investment in the property is approximately $149.4 million, including a $133.8-million purchase price and another $15.6 million in improvements and other acquisition-related costs.
Michael Medzigian, CEO of Carey Watermark, also said he is seeing a lot of interest in the resort sector. He said one thing he likes about resorts is that it is difficult to build in the sector, which limits supply. Meanwhile, properties in other locations, such as suburban, airport, and urban, are being built with more frequency.
“After the downturn, the first wave of investment was in urban markets and people were a little circumspect about resort markets,” he said. “That’s changing. Resort markets are getting a lot of attention now.”
Still, acquiring a resort property can be challenging because there are more moving parts, Medzigian said.
With its Hawks Cay deal, for instance, the property features many different uses, including a residential rental program and marinas. This means there are a lot of extras that need to be underwritten, Medzigian said.
“That makes the transaction often more challenging with a lot more things that need to be underwritten, but to me when you have a large land holding with a lot of moving parts, a lot of different uses, they are more operationally intensive, so by definition there are more ways to add value,” he said.
“There is good and bad, but certainly there is more work when you’re doing the transaction,” he added.