A clear dichotomy exists between the operating fundamentals of the U.S. lodging industry and the lackluster economic growth being experienced nationally and in other parts of the world. New supply of U.S. hotel rooms continues to remain low, room night demand growth is steady, average rates are increasing, and for the most part hotel values are rising. On the other hand, volatile stock markets throughout the globe, economic distress on the European continent, and political paralysis in the U.S. have contributed to a sentiment of unease and fragility. Debt markets continue to oscillate as investors focus on the degree to which the commercial mortgage?backed securities (CMBS) market for floating rate mortgages evolves; however fear of sudden economic and/or geopolitical shock(s) has hindered hotel sale transaction activity. Furthermore, anticipation of higher asset prices during the next 12 to 24 months has resulted in reluctance of many potential sellers to transact. At this point it appears that U.S. hotel sales transaction volume during 2012 will likely be lower than 2011.
LW Hospitality Advisors (LWHA) continuously monitors the major U.S. hotel sale transaction market. The LWHA Q2 2012 Major U.S. Hotel Sales Survey includes 26 single asset sale transactions over $10 million each that are not part of a portfolio allocation. These transactions totaled roughly $1.1 billion, and include approximately 5,100 hotel rooms with an average sale price per room of approximately $207,000. By comparison, the LWHA Q2 2011 Major U.S. Hotel Sales Survey identified 42 transactions totaling more than $3.6 billion including 12,800 hotel rooms with an average sale price per room of $285,000.
Notable observations from the LWHA Q2 2012 Major U.S. Hotel Sales Survey include:
- 2 single asset sales totaling $100 million or greater in proceeds were consummated nationally;
- 7 transactions, or roughly 27 percent of the national total, included assets located in California;
- RLJ Lodging Trust was the dominant acquirer of major U.S. hotels with three asset purchases during Q2 2012 totaling roughly 700 rooms and aggregate purchases of roughly $183 million;
- Sunstone Hotel Investors Inc. followed with two acquisitions in Chicago totaling over 770 rooms for an aggregate sum of just over $180 million.
On an YTD Q2 basis, the LWHA 2012 Major Sales Survey includes 52 single asset sale transactions totaling over $2.9 billion. The roughly 12,400 rooms that traded represented an average sale price per room of approximately $237,000. By comparison, the LWHA YTD Q2 2011 Major U.S. Hotel Sales Survey identified 78 transactions totaling more than $6.4 billion including 27,200 hotel rooms with an average sale price per room of $235,000. A dramatic contrast is clear with the total dollar volume of major US hotel sale transactions during the first half of this year more than 50 percent lower than during the same period of 2011.
Other notable highlights from the LWHA YTD Q2 2012 Major U.S. Hotel Sales Survey include:
- 9 single asset sales totaling $100 million or greater in proceeds were consummated nationally;
- 20 transactions, or roughly 40 percent of the national total, included assets located in California and New York;
- Of the 52 sales transacted nationally, 42 or roughly 80 percent of the assets are located in coastal states;
- Private equity and non?traded REIT?’s have been the dominant acquirers while public entities consummated a handful of major single asset sales.
Despite a sluggish economy, U.S. lodging industry fundamentals continue to be fairly strong. The good news is that demand trends remain positive, particularly business transient demand in major urban markets. Group business continues to be sluggish but slowly improving.The bad news is, given a myriad of global and domestic issues that can develop into full blown calamities, short term future industry performance is fragile. Any downturn in U.S. hotel metrics that may occur will be moderated by limited new hotel development, which will fundamentally extend the current up cycle. The sale transaction market remains slow, however large sums of all types of raised capital from around the globe continues to be aimed at the U.S. lodging sector which has traditionally offered superior risk adjusted returns. Sale transaction activity will gain traction as billions of dollars in hotel debt maturities occur during the next 24 months, and many existing owners will be unable and/or unwilling to fund brand mandated PIP
requirements. Furthermore, sophisticated investors will continue to prune their portfolios and dispose of non-core assets, and recycle capital into new opportunities. Finally, during the next several years, as the investment holding period of many private equity funds that own hotels sunset and execute exit strategies, many assets will be brought to market.