Caution Tempers Hotel Sales Outlook

Adler says US hotel REITs will be net sellers this year.

CHICAGO—The lodging investment sales outlook for 2016, both domestically and globally, is a bit more muted compared to the results that were tallied for 2015, according to JLL’s Hotel Investment Outlook. The firm is projecting US transaction volume of $35 billion this year, compared to $43 billion for the year prior, and $70 billion worldwide, a drop-off globally of 15% to 20%. However, JLL notes that projected US volume for the year will exceed the initial forecasts for ’15, which marked the second-highest year on record for domestic hotel transactions. Globally, the projected tally will exceed 2014 actuals and mark ’15 as an outlier year boosted by marquee deals. Similarly, domestic transaction totals for ’15 were 60% higher than in the year prior. JLL sees investor sentiment weighed down by economic volatility stemming from the unpredictability in US equity markets and abroad, the impact of low oil prices on Middle East economies, concerns about China’s future growth prospects and uncertainty in emerging markets such as Brazil and Russia. However, the Investment Outlook sees positive momentum as the lodging industry remains in an expansionary stage. Domestically, investors are re-trading assets purchased earlier in the recovery cycle, and momentum is further fueled by private equity fundraising and the funds’ pursuit of large single assets and portfolios alike. “For the first time in more than five years, REITs in the US will be net sellers, as they seek to exploit the disconnect between their share value and asset values by selling non-core assets and buying back their stock,” says Arthur Adler, managing director and CEO of JLL’s Americas hotels & hospitality group. This past December, the Blackstone Group closed on its $6-billion acquisition of Strategic Hotels & Resorts Inc., and Adler says JLL expects to see more REIT privatizations “given that they are trading below net asset value and hotel assets being privately held are currently worth more those being held publically. Given this dynamic, offshore investors and others stand to become the second-largest buyer type after private equity.” Investors surveyed by JLL after the Federal Reserve began normalizing interest rates said they expect hotel cap rates to increase slightly during the next six months, an opinion in part influenced by interest rate policy projections. Overall, though, JLL predicts that the interest rate environment this year will remain benign and changing rates’ impact on asset pricing will remain “very minimal.”