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With a strong bench of buyer groups interested in acquiring assets, worldwide hotel deal volume is expected to reach $33 billion in 2013, according to Jones Lang LaSalle’s (JLL) Hotel and Hospitality experts. Private equity players, real estate investment trusts (REITs), sovereign wealth funds, and family conglomerates will be among the key buyers.
“What’s unique about this time period is the diversity of investor types that are interested in investing in the lodging industry,” said Art Adler, CEO of Americas, JLL Hotels.
The U.S. remains the world’s most liquid hotel investment market, and will lead the Americas region to transact approximately 55 percent of the global transaction volume in 2013.
Hotel operating fundamentals are poised to remain strong this year, but each region will have leaders and laggards. Mark Wynne-Smith, global CEO for JLL Hotels, said the key coastal cities in the U.S. are likely to perform the best. Internationally, cities such as Tokyo, London, and Barcelona are equally strong and should see healthy trading growth. Certain cities in central Europe and China have experienced a significant amount of over-development in recent past, explaining their slowdown in activity.
Offshore capital into the U.S. is approximately $3.2 billion since 2010. In the next 24 months, JLL expects that offshore investors will start looking inland, beyond the key coastal cities. He cites the recent deal in which Host Hotels sold the Atlanta Marriott Marquis to an offshore investor for $293 million.
“Clearly some of these other key cities are going to be on the shopping list,” Wynne-Smith said. “The main reason is yield. Offshore investors are very comfortable buying trophy assets, and you can see some of the top prices per key that the market has achieved have been driven by offshore investors. The cities in the center of the country clearly offer yield, and the sovereign wealth funds are going to concentrate most on those markets.”
Industry fundamentals, availability and cost of capital, REITs’ stock prices, amount of product on the market, and hotel ownership composition all drive hotel transaction levels. JLL analyzed these factors going back about 20 to 30 years to see how they have impacted transaction volumes.
Global debt availability is expected to be at its highest level since 2007. Both debt and equity are necessary to drive volume. “You could have a significant amount of equity capital chasing deals in the marketplace,” Adler said, “but that’s not necessarily going to result in transactions. Without the debt component, you can’t get to the yields that are required.”
There is currently about $60 billion of buying power just within the REITs and private equity funds, Adler said, against about $17 or $18 billion of property that transacted in 2012. In some cases, capital brings property to market, and other times it’s because of issues on the seller side. “There needs to be an equilibrium in terms of pricing in order for there to be trades,” Adler said.
JLL experts believe there will be a significant amount of property coming to market due to a combination of the great deleveraging ($55 billion of key mortgage-backed security debt that will come due over the next few years), fund life issues, and investors selling assets. “We’re going to consistently see more transaction volume going out into the future than we saw in past cycles,” Adler said. “The reason is there are many more hotels today in the hands of traders versus holders.”
Twenty years ago, hotels were in the hands of financial institutions, hotel companies, and C-corps that held forever, but now there are more hotels in the hands of institutional investors and private equity funds that trade. Even REITs trade more often now. Adler anticipates that this will be a long-term shift.
“I think that’s good for the industry that these properties turn over,” he said, “because when they turn over, they’re reinvented, repositioned, new capital goes in, and there is better management potential to these assets.”
One trend JLL has seen emerge that will continue is the consolidation of select-service and extended-stay hotels. “We’ve never seen more interest on the part of private equity in that segment of the industry,” Adler says.
JLL still sees a strong presence in the market of REITs and other buyers who need less leverage in order to complete their transactions, said Mat Comfort, executive vice president of JLL Hotels. “What’s transformed over the last 18 months has been truly incredible on the finance side of things, and that was driven primarily by the CMBS (commercial mortgage-backed security) re-emergence in 2012. There was a change of heart and mindset from bond buyers—they became much more receptive to fixed-income products such as real estate.” And within real estate, they found hotels appealing because lenders could get higher yield while still having high quality markets, assets and sponsorship.
The strong return of the CMBS market has two-fold affect. As bond buyers gobbled up available tranches that were released to the market, Comfort said, it impacted pricing, proceeds, structure, terms, and other elements borrowers look for. While lenders were typically comfortable with a 60 percent loan-to-value ratio (LTV), JLL has seen leverage edge up to 65 and even 70 percent for some CMBS lenders.
The second impact is that it induces other lenders to the marketplace, and gives validation that hotels are an appealing asset class that has some security. “It creates additional competition,” Comfort said. “That’s what we saw in 2012 and the momentum we have going into 2013 is a much deeper and broader lender pool that is allowing more competition on high-quality assets. But perhaps more important is more interest in secondary and tertiary markets and assets and sponsors that don’t have quite the same platinum level that we’d seen historically being most eligible for debt.”
This broader array of asset types that are eligible for financing is going to drive pricing going forward in 2013. JLL is seeing a strong reception from lenders that include not only CMBS lenders but also insurance companies, domestic and foreign banks, debt funds, and specialty financiers. “All trends are heading in a positive direction at this point in time,” Comfort said.
Photo Credit: Harriet Lewis Pallette
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