Against a backdrop of national and worldwide economic fragility and a continued restricted debt market, US hotel sector operating metrics continue to improve from the devastating downturn of 2008-2009. The strong rebound of demand for transient lodging accommodations that commenced approximately 15 months ago endures, and apart from any sudden economic or geopolitical shocks, lodging fundamentals are expected to continue to improve for several reasons including but not limited to:

•Steadily improving demand from corporate, group meeting and leisure generators;

•A limited new hotel supply pipeline, which is expected to remain muted for the foreseeable future; 

• US occupancy, room rates and overall RevPAR levels that are still well below their peaks, indicating significant upside potential. The initial wave of the recent growth in RevPAR was driven mostly by recovering occupancy levels; As occupancies have risen, pricing power has reappeared and higher average daily rates (ADRs) have become a more significant part of RevPAR growth; As ADRs become the predominate force driving RevPAR growth, operating leverage will improve as each incremental dollar of revenue drops to the bottom line due to those dollars generated by higher prices that have few costs associated with them, versus higher volumes.

Publicly traded REITs, which were the largest buyers in 2011, have been less active bidders in 2012 due to relatively low stock valuations. The hotel investment playing field is now more evenly matched between public and private ownership entities. Private equity players have become increasingly active in both primary and secondary markets. Debt markets continue to oscillate as investors focus on the degree to which the CMBS market for floating rate mortgages evolves.

Our YTD Q1 2012 Major US Hotel Sales Survey includes 25 single-asset sales over $10 million each that are not part of a portfolio allocation. These transactions totaled roughly $1.9 billion, and include roughly 7,200 hotel rooms with an average sale price per room of approximately $260,000. By comparison, the 2011 survey identified 36 transactions totaling roughly more than $2.8 billion including 14,400 hotel rooms with an average sale price per room of $193,000.

Notable observations from the survey include:

•Seven single-asset sales totaling $100 million or greater in proceeds were consummated nationally;

•17 transactions, or roughly 70% of the national total, included assets located in California, Florida, and the New York and Washington, DC metropolitan areas;

•Of the 25 sales transacted nationally, eight, or roughly one third, were in the New York metropolitan area including: six in Manhattan; one in Brooklyn; and one in Long Branch, NJ

•Private equity and non-traded REITs have been the dominant acquirers while public entities consummated a handful of major single-asset sales.

•Six months after announcing its intent to acquire Park Central in New York in June 2011, LaSalle Hotel Properties finally closed the transaction during the first week of this year, at a price of $396.2 million, or a reduction of approximately 2.3% from the originally announced price. (LHO also acquired the 335 room Hotel Palomar in Washington, DC from a Kimpton-sponsored discretionary equity fund for $143.8 million.)

•King & Grove’s $520,000-per-room acquisition of the newly developed 64 room Hotel Williamsburg in Brooklyn, NY set a new per-unit high for a hotel situated within the four outer boroughs of New York City. Graves Hospitality, the project’s developer, reportedly received an unsolicited purchase offer “that was simply too good to refuse.”

Accelerating industry profits and healing capital markets will lead to increased transaction volume during the second half of the year as billions of dollars of debt comes due (mainly in 2007-vintage loans). A rise in the number of distressed assets being pushed off the books of lenders is expected, as creditors will finally be willing to absorb write-downs to shed permanently impaired loans to make capital available for stable funding opportunities.

Banks and special servicers are now motivated to sell assets rather than further extend loans or foreclose and own an asset, particularly if the lender has marked the loan to a level at which it can clear the market. Furthermore, many existing owners will be motivated to dispose of hotel assets due to: A) the unwillingness to invest additional capital for needed property improvements; B) the need to invest additional equity to pay down or restructure debt that is nearing maturity, or C) other issues in their portfolios that could be solved by selling assets. The US hotel investment market is entering a period that will cause unprecedented reshuffling of loans and capital creating considerable opportunities for buyers and sellers.

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