NASHVILLE, Tennessee—Even as hotel industry fundamentals continue to improve, the long term value of hotel assets remain somewhat subdued as fears of economic uncertainty remain, valuation experts said during the Hotel Data Conference last week.
Investors judging by today’s climate might be more inclined to buy, but recent economic and industry fallouts remain top of mind and have hotel deal-makers increasingly cautious.
“To buy hotels today, you have to look at prospective improvements on (NOI),” said Angelo Stambules, senior VP of capital markets for Hunter Realty Associates. Capitalization rates “are generally 6% or higher, with the capability to increase to 8%, 10% or 12%. Cap rates on current deals are, from a historical perspective, much lower. That trend has been there by and large for past year or so.”
Vernon Chi, senior VP of the hotel technical services group for Wells Fargo Bank, said that when evaluating hotel values, his team looks at continual improvement of industry fundamentals and asks how much room for continued improvement the industry has.
“We’re generally looking at a three- to five-year horizon of continued improvement,” he said.
Once investors overcome their economic pessimism, deals are relatively easy to get done, panelists said.
Dan Lesser, president and CEO of LW Hospitality Advisors, said there are all types of products entering the market today. For potential buyers, he said hotels are a perfect investment to return yield “if you purchase them correctly.”
“There’s an awful lot of junk out there,” he said. “America is littered with dysfunctional hotels quickly approaching the end of their lives.”
According to the Q2 Hotel Investors Gauge survey, the median LTV in today’s market is 62.5%, compared to 65% after the Q1 survey. The average Libor spread in Q2 was 350 bps with a range of 275 bps to 425 bps and the median term for a hotel loan was five years.
Lesser pointed to Strategic Hotels & Resorts’ acquisition of the Essex House and said the addition of a JW Marriott flag on that property made perfect sense.
“It was genius,” he said. “Everyone was like, ‘Why didn’t I think of that?’”