NEW YORK CITY-The recent bottoming of lodging operating metrics, coupled with a flurry of transaction activity suggests that Q1 2010 may have been an inflection point for the U.S. hotel sector. Long anticipated “green shoots” are now slowly appearing.
Pricing spreads between buyers and sellers are narrowing. Simultaneously, the inventory of attractive opportunities remains fairly constrained given the reluctance of lenders and others who control assets to dispose of them at today’s depressed pricing levels. Savvy, well capitalized investment groups, with lodging industry expertise, have raised pools of funds for opportunities where the risk-reward profile has the potential to provide significant earnings and capital appreciation. It is anticipated that there will be desirable investment opportunities at all levels of the hotel capital stack. Such prospects include: origination of a myriad of lodging real estate loans, the acquisition of performing and non performing hotel loans, structured mezzanine positions, and direct investment in individual assets and portfolios of hotel real estate. Similar to the rebound from prior downturns, investors are seeking opportunities to inject capital in addition to acquisition costs, and to turnaround, reposition and/or rebrand distressed hotel assets with the goal of achieving maximum capital appreciation and, to a lesser extent, current income.
The CB Richard Ellis (CBRE) Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major U.S. hotel sale transaction market. In Q1 2010, the CBRE Major U.S. Hotel Sales Survey, which looks at single lodging asset sales over $10 million each that are not part of a portfolio allocation, identified 14 transactions. These transactions total $710 million, and include 5,000 hotel rooms with an average sale price per room of $140,000. By comparison, the Q1 2009 survey was never published due to the dearth of transactions.
Notable observations from the Q1 2010 CB Richard Ellis Major U.S. Hotel Sales survey include:
- The $200 million sale of the 2,129 room Tropicana Casino & Resort in Atlantic City, NJ, by an investor group led by Carl Icahn, represents the largest trade for the period. The transaction, which took a significant amount of time to close, is perceived as a “bargain basement” price effectuated by a legendary value investor, and may be an indication of the market bottoming.
- The $60 million sale, out of foreclosure, of the 469 room Los Angeles Marriott Downtown at roughly half the $115 million price it garnered in 2007. The deal is yet another data point that supports the notion that, broadly speaking, U.S. hotel asset prices today are +/-50 percent lower than peak levels of just three years ago.
- LaSalle Hotel properties (LHO) acquired the Sofitel Lafayette Square in Washington DC at a reported sub six percent capitalization rate on in place cash flow, and a similar rate of return based upon 2010 projections. The transaction is illustrative of the perceived upside of urban hotel assets in top U.S. markets.
The lodging industry will continue to face noteworthy challenges during the foreseeable future. The U.S. economy, while rebounding, is not expected to produce meaningful job growth, and the housing market continues to be weak. Corporate travel spending, particularly for group meeting and convention business, continues to be muted, and consumer confidence is volatile. Labor issues, particularly the escalating costs of employee benefits, exert negative pressure on profits. Terrorism, both overseas and domestic, clearly remains high on the risk scale. Geo-political issues in unstable regions of the world escalate the possibility of further out breaks of conflict, which could impact travel. On the positive side, relatively low interest rates and limited inflation appear as if they will remain stable over the near term, and the overall conditions in the capital markets have improved dramatically during the very recent past.
The hotel industry notoriously experiences remarkable highs and dramatic lows. Sensing limited downside at this point, smart opportunistic money is positioned to acquire assets now for the ride up to the next high. I believe that journey will be as swift and striking as this last ride down.
Daniel Lesser is the senior managing director of the Hospitality & Gaming Group at CB Richard Ellis (CBRE) based in New York City. The views and opinions expressed in this article are the author's own.
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Daniel Lesser
Daniel H. Lesser, President & CEO of LW Hospitality Advisors LLC (LWHA), brings more than 35 years of expertise in a wide range of hospitality operational, investment counseling, valuation, advisory, and transactional services. He provides services to corporate, institutional, and individual clients as well as public agencies on all facets of hospitality real estate including: litigation support and expert testimony, site evaluation, highest and best use analysis, appraisals for mortgage, acquisition, and portfolio management, workout strategies, operational analysis, development consulting, property tax assessment appeal evaluations, economic impact studies, fairness opinions, deal structuring, and negotiation of management and franchise agreements. Mr. Lesser had been retained in connection with a broad variety of lodging assets throughout the Americas, as well as in Europe, the Middle East and Asia.
