NEW YORK CITY—As we enter 2015, US lodging fundamentals are the most robust I can recall during my 35 year career. Rarely has there been a time when the market was generally favorable to buy, sell, and develop hotels in the US.
(To download the full survey results, click here.)
Several new transaction records occurred this past year. The LW Hospitality Advisors 2014 Major US Hotel Sales Survey includes 153 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $16 billion, and included approximately 45,000 hotel rooms with an average sale price per room of just over $350,000. While US hotel transaction activity has remained steady, per room pricing has increased dramatically. By comparison, the LWHA 2013 Major US Hotel Sales Survey identified 154 transactions totaling roughly $11 billion including 45,000 hotel rooms with an average sale price per room of nearly $243,000. Comparing 2014 with 2013, the number of trades has remained flat while both total dollar volume and sales price per room have increased an impressive 45%.
The US hotel investment market in terms of dollar volume and price per key are clearly on the rise. With a deepening buyer pool, owners are bringing assets to market and investors that include a variety of institutional public and private funds, regional owners/operators, domestic and overseas family offices and high net worth individuals are strongly competing for high-quality properties. Active sellers include institutional public and private funds, as well as brand hotel companies in cases where they can retain or establish long-term management. With significant amounts of domestic and overseas capital seeking cash flow to replace anemic fixed-income returns, the US hotel sales transaction market will continue to gain traction. Yield sensitive capital is aimed at relatively new branded select service hotel product that represents well-positioned cash-flowing assets. Institutional buyers appear willing to pay healthy prices, particularly when offered in a portfolio, allowing investors to deploy additional capital in a single transaction. At this point in the cycle there are no true 'off-market' prospects, and there surely are no steals or bargains to be had for appealing hotels that offer positive in-place cash flow as well as properties that offer obvious value enhancement opportunities. The significant amount of equity chasing deals and the rising cost of acquisitions are prompting some investors to explore new hotel development opportunities in lieu of purchasing existing assets.
A re-emergence of the CMBS market has been the main driver of the abundance of debt capital available for the sector, and the pool of lenders is now broadened to include balance sheet lenders, life companies, banks, and debt funds. Relatively low interest rates continue to support favorable capitalization rates motivating sellers to transact. Approximately $188 billion in commercial mortgage loans will reach maturity between 2015 and 2017. Unless interest rates rise at a quicker-than-expected pace, borrowers on most of those loans will be able to refinance. As the current growth cycle matures, the expectation of continued improving industry metrics will inject greater investor confidence in the lodging sector, leading to higher values.
The US lodging industry faces significant challenges, including rising costs of employee wages and benefits as well as the expanding power of hotel labor unions. Additionally, technological advances continue to allow greater influence of third party on line travel sites and disrupters such as Airbnb, all of which create negative pressure on hotel room rate pricing. If upheld by the courts, the National Labor Relations Board recent determination holding McDonald's Corp. a joint employer with its franchisees raises serious concerns, with long-term implications for brand hotel licensing. Finally, event risk clearly is at the top of the spectrum of uncontrollable forces that can dramatically and swiftly negatively impact the hotel business.
While plenty of macroeconomic and political uncertainties exist, these issues have not affected business investment and consumer confidence. In the current climate, investments in US lodging assets are generally perceived to offer the most attractive growth profile of any real estate sector.
To view the LW Hospitality Advisors 2014 Major US Hotel Sales Survey, click here.
Daniel H. Lesser is president and CEO of LW Hospitality Advisors. The views expressed in this column are the authors' 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.
