| NEW YORK CITY—Since the economic outlook for the United States calls for several more years of steady, sustainable growth fueled in part by net job growth and modest increases in GDP, hotel property transactions and pricing are expected to continue on their present upward trend. Record sums are being routinely paid in many US metropolitan areas for desirable lodging assets driven in some measure by epochally low interest rates that have prevailed since the mid 2000's. Enormous investment demand from private and institutional capital from throughout the globe is targeting hotel properties on both coasts as well as major cities within the nation's interior. The stars remain aligned and the fundamentals of the US lodging industry are simultaneously favorable to buy, sell, and develop a variety of lodging product types particularly in gateway American markets. |
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The LW Hospitality Advisors (LWHA) Q1 2015 Major US Hotel Sales Survey includes 38 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $3.2 billion, and included approximately 11,300 hotel rooms with an average sale price per room of $280,000. By comparison, the LWHA Q1 2014 Major US Hotel Sales Survey identified 31 transactions totaling roughly $2.5 billion including 8,100 hotel rooms with an average sale price per room of nearly $310,000. Comparing Q1 2015 with Q1 2014, the number of trades and total dollar volume has impressively increased, sales price per room decreased roughly 10 percent. Southern California, South Florida, and New York City have been the most active transaction markets.
Increasing sums of foreign direct investment in the US lodging sector, which shows no signs of let up has led to select transaction prices continuing to exceed prior record levels. On the heels of the recent $1.95 billion sale of the Waldorf Astoria New York, the largest ever sale price of a US hotel, the brand new 114 room Baccarat Hotel New York has traded for $230 million or a record per room sale price of $2 million. Additionally, by a wide margin, two trades set new high water marks for California hotels, namely the $1.7 per room sale of the 47 room Malibu Beach Inn and the $1.4 million per room trade of the 250 room Montage Laguna Beach. Chinese investment in trophy assets is not the first wave of foreign buying of irreplaceable American hotels. Japanese conglomerates were big buyers during the 1980s, and there has been a steady stream in recent years of petrodollars from Middle Eastern and Asian government funds.
The Q1 2015 $278 million acquisition of the James Royal Palm Hotel by Chesapeake Lodging Trust is emblematic of the dramatic rise of US hotel prices. The asset was acquired by KSL Capital Partners in Q2 2011 for $130 million, and including an additional $50 million invested for a comprehensive renovation, the seller realized a $102 million gain, or appreciation of almost 60 percent over the four year hold.
Consolidation of US lodging real estate portfolios and hotel companies is occurring as this current investment cycle approaches a new peak. Active buyers and sellers of hotels taking advantage of strong demand and pricing to re-shape portfolios runs the gamut from publicly-traded REITs and institutions to private equity funds, non-traded REITs and value-add investors. Sellers have been motivated by a wide variety of strategies including: monetizing on rising values to bake in gains, de-lever balance sheets, and recycling capital to fund new investments. Portfolio sellers have an added incentive to execute now as these transactions tend to generate 5 to 10 percent pricing premiums.
An oncoming wave of CMBS maturities for vintage 10-year loans originated from 2005 to 2007 will commence this year. These maturities will lead to increasing CMBS origination, however many older functionally obsolete properties whose values are now lower than ten years ago, will force sponsors to sell or recapitalize with fresh equity as part of a refinancing. Currently there are far more CMBS lenders today than 10 years ago leading to favorable terms, however in the past greater competition amongst debt providers has led to less scrutiny on underwriting. With a highly competitive U.S. hotel acquisitions market, desirable assets are once again experiencing compressed due diligence periods, indicating an approaching peak, and the possibility of investors experiencing future negative consequences as a result of being blind to past failures. Additional risk is faced by those investors now entering the sector who digress from their core real property strengths and transact with little to no prior lodging investment experience.
The lodging sector is cyclical and experiences dramatic highs and manic lows; however each peak tends to exceed the high point of the prior cycle. The question at this juncture is how much more, if any runaway exists before we reach the current cycle peak?
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