John Strauss
As of YTD 2018, hotel transaction volume in the United States reached $29.7 billion, more than a 25% year-over-year increase, according to new JLL stats.
There are several reasons for the increase, John Strauss, senior managing director and co-head of Americas Hotel Capital Markets for JLL tells GlobeSt.com: The industry got a boost of energy in part because of tax reform, for starters. Also, hotel performance tends to track and is tightly correlated with GDP. The growth of the last year or so has created momentum in the hotel sector's underlying fundamentals–hence the strong appetite for investors to buy into this sector, he says.
Private Equity Leads the Way
But who are these investors? Not surprisingly, given their ubiquity across the commercial real estate asset classes, this year private equity represents 37% of hotel acquisitions in the United States, or $11 billion. This compares to 30% ($7.1 billion) for all of 2017.
One reason for their stepped up presence, according to JLL, is that private equity groups have more capital than they've had in the past, allowing them to pursue a wider variety of investment strategies related to hospitality, ranging from core plus to opportunistic plays.
“Private equity has gone on the offensive in last couple of years,” broadening their strategies by targeting full service hotels and portfolios, Strauss says. “Select service and primary markets were once the main focus of private equity but as we got into these later stages of the cycle, private equity has gone after resort hotels, bigger convention and meeting space” — categories that have experienced little to no new supply because of lack of construction financing.
“So they've become the dominant player this year for these assets, writing big checks” of around $500 million to $1 billion in transaction sizes, he says.
Other Groups
There are several other groups who are also demonstrating a strong appetite for hospitality product, JLL reports. Development companies have become more active in 2018, accounting for 13% ($4 billion) of YTD 2018 hotel acquisitions, compared to 10% for all of 2017.
REITs as well have continued to be active in 2017 and 2018, Strauss says, but they are more cautious than other buyers right now. “They've always been always a disciplined buyer pool.” Strauss estimates that 50% of REITs have been buying offensively on a selective basis this year. REITs compromise 25% of the buyer mix YTD.
Other buyer groups that are well capitalized include owner operators like Hyatt. The company is growing their portfolio by taking advantage of tax exchanges, Strauss says.
Foreign buyers as well are active. JLL reports that offshore activity has slightly increased this year: YTD 2018 figures show offshore capital is equal to $4 billion of US hotel acquisitions, compared to $3.6 billion over the same period in 2017.
Strauss notes while China has become a net seller of hotel assets, the US is seeing investors from other Asian countries as well as from Europe and the Middle East. These investors are very active but they tend to limit themselves to the top 5-7 strongest US markets.
And finally there are the high net worth families and individuals investing in the space. “Given the yield premium for hotels you will always have this group buying assets depending on location and motivation,” Strauss says.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
