“I wish I could tell you that there was going to be a huge increases in transactions in 2018, but we don't think that is going to be the case,” Mark Wynne Smith, global CEO of JLL-Hotels, said at ALIS The Numbers: What We Are Dealing With and Where Are We Headed panel. Smith gave forecast of hotel transaction volume this year, and why he expects transactions to remain flat. He also gave some insight into capital markets activity this year for hotels. “We think there is going to be roughly the same as what we saw in 2017, which is about $24 billion of hotels transacted. This year, we had about 40% single assets. We will probably see about 30% this year. We just have less portfolios coming through.”
As a result, many buyers are seeking capital markets solutions rather than trading into other asset classes. “Our clients are now seeking capital solutions rather than pure exits,” said Smith. “We are having increased conversations around recaps and changing of partners. The traditional exit and buy into the next product is going to be reducing significantly.”
Smith says that difficulty reinvesting is one of the reasons transaction volume is going to remain low. “If you sell an asset today, the cost of going back in is highly likely to be getting a lower return on equity invested. There is generally less product around for that reason, so that is going to hold back the total volume,” he said.
The financing market is also keeping transaction volumes flat this year. “There is a lot of commentary at the moment about how much financing is out there. We are expecting that there will be compression of spreads this year, somewhere between 50 and 65 basis points,” explained Smith. “We are going to see treasuries increase through the second half of the year.”
Still, there is liquidity in the market for hotel deals, particularly from the debt funds. Liquidity has increased rapidly over the last four years, and Smith expects it to continue to grow in 2018. “The debt funds will see a significantly increase in capital. If I look four years ago, the raise annually was just under $4 billion,” said Smith. “It has just gone up to just under $50 billion, and is highly likely to increase. That is a 200% increase in liquidity.”
While the debt funds are increasing liquidity for hotel product, the banks are pulling back and decreasing their loan-to-value requirements. “The big trend that we noticed through the year is the big reduction of loan-to-value, which banks are willing to do,” said Smith. “It was at 65% and has dropped to 55%, and we don't think that is going to change at all, especially for where we are in the cycle.”
In addition, offshore capital may be sitting on the sidelines while domestic investors dominate the hotel investment market. “I think that mostly domestic buyers are going to be doing the buying,” Smith concluded. “Offshore capital still wants to get into the country, but is struggling because of demand from domestic buyers is so strong.”
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