From a hotel investment perspective, last year had a bit of a Jekyll & Hyde complexion to it. Hotel investment activity reignited at seemingly strong prices. But on the other hand, distress still plagued many assets with foreclosures and bankruptcies ever present. Nevertheless, the year certainly appeared to be a turning point, particularly with the debt markets loosening a bit towards year end.
Through the end of 2010, STR Analytics tracked approximately US$8 billion in hotel transactions. This compares to less than US$2 billion in 2009. The year wrapped up strong with US$2.7 billion in deals during the fourth quarter. Per-room values showed strong growth year-over-year with stronger pricing and far more “market” transactions. The average price per key for 2010 rebounded to US$176,000 per room, a huge leap from the stress-induced US$103,000 per room achieved in 2009.
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The volume of distressed sales through bank sales, foreclosure auctions, and bankruptcy workouts remained high in 2010. However, the rise in non-distressed deals overshadowed the plethora of assets still hindered by the economy. In 2010, approximately 13% of hotel asset trades involved distressed assets. By comparison, more than 27% of the transactions in 2009 were troubled assets. Some of the more notable distressed asset sales of 2010 are shown below.
| Property | Location | Rooms | Price | Price/room | Buyer |
| Sea Island Resort | St. Simons Island, Georgia | 215 | US$212m | US$986,047 | Anschutz Investments, Starwood Capital Group, Oaktree Capital Management, Avenue Capital Group , |
| W New York Union Square | New York | 270 | US$185.2m | US$685,926 | Host Hotels & Resorts |
| Royal Palm Hotel | Miami Beach, Florida | 409 | US$126.1m | US$308,313 | Sunstone Hotel Investors |
| Amelia Island Plantation | Amelia Island, Florida | 900 | US$67.1m | US$74,556 | Omni Hotels & Resorts |
| Daufuskie Island | Hilton Head Island, South Carolina | 186 | US$49.5m | US$266,129 | Montauk Resorts |
| Vail Plaza Hotel and Club | Vail, Colorado | 138 | US$46.5m | US$336,957 | Ferruco family |
| Aston Kauai Beach at Makaiwa | Kapaa, Hawaii | 311 | US$38m | US$122,186 | JMI Realty, Behringer Harvard |
| Grand Hotel Minneapolis | Minneapolis | 140 | US$33m | US$235,714 | Pebblebrook Hotel Trust |
| Casa Madrona | Sausalito, California | 63 | US$11.4m | US$180,952 | Sima Corporation |
Even several stalled redevelopment projects changed hands in 2010 with the goal of seeing the projects to fruition. These include the historic Knickerbocker Hotel in Manhattan, the Watergate Hotel in Washington, DC, and the Seville Hotel in Miami Beach.
With large amounts of capital to spend, real estate investment trusts led the way accounting for almost 40% of the hotel acquisitions last year. Apple REIT Nine, Chatham Hospitality Trust, Chesapeake Lodging Trust, DiamondRock Hospitality Company, Host Hotels & Resorts, LaSalle Hotel Properties, and Pebblebrook Hospitality Trust accounted for the vast majority of the US$3.6 billion in REIT acquisitions in 2010. This trend is anticipated to continue through 2011.
• Read “US REITs will be active again in 2011.”
This is not to say that other major investment groups stood by the sidelines. Highgate Holdings and AREA Property Partners (formerly known as Apollo Real Estate Advisors) were also active placing capital in 2010. As many analysts anticipated, Asian investment groups also have been jumping in the mix, primarily on the West Coast with acquisitions of the St. Regis Aspen, Los Angeles Marriott Downtown, L’Ermitage Beverly Hills, and most recently, the Sheraton Universal.
On the other side of the equation, smart investors still found ways to generate returns by divesting assets in a somewhat uncertain environment. Companies such as The Briad Group, HEI Hotels & Resorts, Kimpton Hotels & Restaurants Group LLC, LaSalle Hotel Properties, Moody National Companies, Tishman, and White Lodging Services were among those who took advantage of the market’s hunger for quality assets and sold multiple properties at solid price levels. Some of the major hotel conglomerates, specifically Fairmont Raffles, Hyatt Hotels and Resorts, and Starwood Hotels & Resorts Worldwide, also pared down their portfolios.
Some of the most compelling takeaways from the spike in hotel real estate transactions in 2010 are the key factors that are not happening. While the economy is generally moving in a positive direction, we have yet to see strong growth in many aspects. In particular, unemployment is still very high and will likely take a couple of years to ebb to more reasonable levels. Despite this, demand is at an all-time high in most markets. However, pricing power remains elusive to operators as they attempt to rebuild profitability. And while we are beginning to see financing become more accessible, it is at stringent terms and primarily reserved for high-quality, cash-flowing assets. Nevertheless, 2011 looks to be an even more robust year in terms of hotel investment activity.