Private Investors Fuel Bidding for Hotels

HOUSTON—Healthy employment growth and increased consumer spending continue to drive hotel performance nationwide. Occupancy rose to a 30-year high in the spring, driving increases in ADR and RevPAR, according to a mid-year hospitality report by Marcus & Millichap.

In addition, transaction velocity rose roughly 2% nationwide as demand picked up for properties in many of the nation’s smaller markets. Private investors accounted for more than half of sales volume, with buyers in the $1 million to $10 million price tranche particularly active, Marcus & Millichap says.

This trend will continue as the stimulative effects of the new tax laws drive economic growth and unemployment remains low. These rising confidence levels will likely buoy room demand through the remainder of the year, keeping occupancy at a historical high.

A healthy pace of hiring, rising wages and a low unemployment rate are underpinning strong summer travel expectations, with travel associations expecting travel expenditures to increase by 5% this year. Rising expenditures will bode well for hotel occupancy, ADR and RevPAR. However, one caveat is that several markets with large development pipelines may face supply pressures, reducing occupancy and slowing RevPAR growth, Marcus & Millichap cautions.

As noted, the demand has resulted in increased private investor competition, which has been growing steadily since 2014 — sentiments that are echoed by Robert Wiemer Jr., senior managing director of The Plasencia Group, who points to Houston as an example.

“Given the Houston market’s downturn in 2015 and 2016 along with what is now a much more stabilized energy sector, many in the investment community are actively evaluating Houston-area lodging investments once again,” Wiemer tells GlobeSt.com. “As both public and private discussions advance, we believe there will be some compelling opportunities for those entities that are comfortable with the energy metric. Each Houston area submarket will offer varying degrees of energy demand reliance.”

As an example, Wiemer says the Energy Corridor along Interstate 10 in West Houston is obviously energy dependent while the Texas Medical Center is energy independent. From the perspective of current owners of hotels in the Houston area, the prospect of exiting an investment in the region at an acceptable price point continues to improve as confidence in the ongoing economic diversification increases and clarity improves in the energy sector.

“As the hospitality investment community continues to evaluate acquisition opportunities, the ability to identify scenarios that offer an interesting and compelling storyline is becoming increasingly more challenging,” Wiemer continues. “With many markets and submarkets now entering a seventh, eighth or even ninth year of RevPAR gains, the overriding question is how much farther can a particular market continue to advance without some level of flattening or even retrenchment?”