An interesting dynamic has been evolving within the US hotel business as, against a backdrop of sagging consumer confidence, economic turmoil and a restricted debt market, sector operating metrics have been improving.  The strong rebound of demand for transient lodging accommodations that started in 2010 has endured throughout this past year.  Barring any sudden economic or geopolitical shocks, US lodging fundamentals are expected to continue to improve due to the phenomenon of rising demand coupled with limited new hotel supply.  In addition to the recovery of corporate and group meeting demand, inbound international travel has particularly benefited hotels situated in gateway US cities.  With this said, the US economy overall is suffering from tepid growth and high unemployment, issues that will challenge the economy and therefore the lodging business, including the hotel transaction market, during the foreseeable future.

Broader economies and markets experience cyclical behavior.  It is not a question that our economy will vigorously expand again; the question is when.  Similar to past market nadirs, this is the best time to deploy capital into hotel value enhancement opportunities. With the world awash with liquidity, many types of investors have raised capital and are actively seeking US hotel investments.  Examples include: high net worth individuals and family offices, private equity groups, pension and hedge funds, insurance companies and public hotel ownership entities. Investment in and/or acquisition of US real estate, including lodging assets, is appealing to foreign investors throughout the world including: France, Germany, Spain, Israel, Russia and China.  Superior risk-adjusted returns, diversification, inflation hedge, capital appreciation and perceived relative security and stability are among the alluring attributes that attract overseas investment in American commercial property, including hotels.   While both US coasts continue to be of heightened interest, secondary and particularly tertiary markets, with the exception of portfolio transactions, have struggled to gain attention despite compelling opportunities in many such areas.

We continuously monitor the major US hotel sale transaction market. The LWHA 2011 Major US Hotel Sales Survey illustrated below includes 130 single-asset sale transactions over $10 million each that are not part of a portfolio allocation. These transactions totaled roughly $8.9 billion and include roughly 41,000 hotel rooms with an average sale price per room of approximately $217,000. By comparison, our 2010 survey identified 84 transactions totaling more than $5 billion including 24,000 hotel rooms with an average sale price per room of $200,000. US hotel transaction activity has clearly gained traction since 2009 during which 36 hotels that included 18,600 rooms traded for a total of only $2.3 billion or an average sale price per room of $193,000.

Trade activity of US lodging assets declined dramatically during the last two quarters of 2011 as illustrated on the following table:

It is interesting to note that during Q3 and Q4 2011, a dramatic decline occurred in: the total number of trades, the total dollar volume of major sales, and the average price per room sold.  Furthermore, the average deal size was approximately 45% below prior quarters of this year. 

Notable observations from our 2011 survey include:

•         A total of 65 transactions, or 50% of the national total, included assets located in California, Florida and the New York and Washington DC metropolitan areas;

•         29 major trades occurred in California;

•         7 sales occurred in both the San Francisco and San Diego markets;

•         17 transactions occurred in the New York metropolitan area;

•         13 major trades occurred in Manhattan;

•         12 major trades occurred in the State of Florida;

•         7 transactions occurred in the Washington DC metropolitan area.

•         Of the top 10 2011 major U.S. hotel sales by total price, six trades, or 60%, occurred in New York

•         Chesapeake Lodging Trust was the dominant acquirer of major US hotels with seven for the 2011 year totaling roughly 1,900 rooms and aggregate purchases of over $500 million. Pebblebrook Hotel Trust followed with 6 acquisitions totaling over 1500 rooms for an aggregate amount of just over $500 million.

•         With the exception of the Denver Marriott City Center and the Holiday Inn New York City Midtown sales which both closed during Q4 2011, the remaining combined 11 acquisitions of both Chesapeake and Pebblebrook occurred during the first half of the year.   During the second half of the 2011, as their stock prices dipped reflecting investor bearishness on the U.S. economy and its impact on the lodging sector, publicly traded REIT’s ceased their acquisitive positions.

•         Other significant acquirers (both public and private entities) of major US hotels during the year included: Hersha Hospitality Trust, the Apple REIT series and RLJ Development/RLJ Lodging Trust (all at five); and Inland American Lodging Group Inc., HEI Hotels and Resorts, DiamondRock Hospitality and Cornerstone Real Estate Advisors (all at three).

•         At least 15 dispositions of major US hotels were of lender-controlled assets.

•         Significant sellers of major US hotels included: Ashford Hospitality Trust and Sage Hospitality Resources (both at four).

•         Although below replacement cost, the trade of the Elysian Hotel at over $500,000 per room represents a new per room high water mark for Chicago. 

•         The June 2011 announcement of LaSalle Hotel Properties’ proposed $405.5 million acquisition of the Park Central in New York closed in this first week of the New Year at a price of $396.2 million, or a reduction of approximately 2.3%.

•         Several previously announced noteworthy 2011 US hotel sale transactions were terminated prior to closing including:

•         Host Hotels & Resorts $442 million acquisition of the Grand Hyatt in Washington DC;

•         Host Hotels & Resorts contract to acquire the St. Regis Monarch Beach in Dana Point, CA;

•         Chatham Lodging Trust’s $24.9 million acquisition of the Residence Inn Pittsburgh University Medical Center.

During the next 12 to 24 months, billions of dollars of hotel loans originated during the last market peak of several years ago will mature.  The decline of asset values and tighter underwriting criteria will make it nearly impossible for hotel owners who have held on during the recent downturn to effectuate traditional refinancings.   Opportunistic rescue capital prospects will abound as many hotel loans will need to be restructured and/or recapitalized with additional debt and/or equity.  Furthermore, fresh capital will be required for scores of US lodging assets that are in need of significant capital upgrades as hotel companies will no longer allow a moratorium on conforming to brand standards and deferral of these expenditures.

Despite economic uncertainty and volatility, and against the backdrop of funding-gap issues during the near term, US hotel operating metrics are anticipated to continue to improve. While many loans have already been restructured or recapitalized, many lenders have pushed the problem into the future aka “kicking the can down the street.”  While hotel foreclosures are anticipated to rise, many lenders thus far have been reluctant to pursue such remedies and will likely not be eager to take control of financially troubled hotel assets.  Superior risk adjusted return opportunities will attract all types of investors, as lenders and special servicers with exposure to the US hotel sector will either sell assets they control or facilitate workout solutions that will appropriately compensate their positions and those of freshly injected capital.

Daniel H. Lesser is president and CEO of LW Hospitality Advisors LLC in New York City.  He may be reached at [email protected]. Views expressed here are the author’s own.