For well over a decade, the think-tank Lodging Industry Investment Council (LIIC) has been surveying its members to develop a list of major hotel investment opportunities and challenges for the coming year. LIIC just released its 2017 survey’s “Top Ten” on investment sentiment and attitudes towards the lodging industry in the forthcoming 12 months.
Members of LIIC represent investors, lenders, corporate real estate executives, REIT’s, public hotel companies, brokers, and significant lodging equity sources with direct acquisition and disposition control over more than $40 billion in lodging real estate. Of LIIC’s hotel investors members, 25 percent having successfully purchased a hotel in the last 12 months and an additional 16 percent have made offers. Moreover, 76 percent plan to sell a hotel in the next 24 months.
The LIIC’s 2017 Top Ten results include:
Hotel Real Estate: Overall, the 2017 results were more positive than 2016 and starkly different than the peak year survey in 2015. Private equity followed by listed REITs are predicted to dominate the purchase of upscale to luxury hotels while regional owner/operators are projected to dominate the purchase of economy to upper-midscale hotels.
Movement in the Hotel Real Estate Cycle: Most investors (68 percent) believe we are still in the extra innings of the current cycle that began in 2009, whereas a minority (32 percent) believe we have begun a new cycle. Projections for the U.S. economy are positive, with 60 percent forecasting GDP growth averaging greater than 2 percent over the next 24 months.
Real Estate Values: Over the next 12 months, 54 percent project that lodging real estate values will remain flat in comparison to 2016, while 36 percent forecast a slight increase in values (up to 5 percent). The favorite investment target was upper-upscale lodging properties.
Greatest Threats to Hotel Investment: Of the threats to hotel investment, 90 percent of members cited new hotel supply as the current and dominant top investment concern. Still, 81 percent are building new lodging assets.
Increasing Interest Rates: With interest rates increasing gradually up to 100 bps over the next 12 months, sellers need to understand the impact on asset pricing for hotels they are looking to sell.
Minimum Wage: Down from last year, 28 percent of investors reported being threatened by government mandated minimum wage increases and the corresponding impact on hotel operating costs, and 74 percent anticipate a gradual negative impact over the next five years.
Hotel Transaction Market: 52 percent forecast the total dollar volume of U.S. hotel transactions in calendar 2017 will be down relative to year-end 2016 and 22 percent believe volume will be flat. Similarly, 46 percent believe the number of assets sold to be down, while 32 percent anticipate the number of assets sold to be flat.
Hotel Debt Available, Yet Less Favorable: Hotel investors are “debt leery” causing 56 percent to seek refinancing of existing debt over the coming year even though 52 percent believe the optimum refinance window closed in the last six months. Owners have more concern with interest rate increases on senior debt than lender’s available leverage percentages.
Lodging Development Marches Along: Investor attitude stays positive on the concept of building new lodging properties. As for developing hotels, 66 percent agreed that it was a good idea “if you are selective about product and markets.” And 81 percent of relevant LIIC members have new hotels actively under development.
Quantity and Quality on the Buying Market: When it comes to the number of hotels for sale, 42 percent of investors believe that a “below average quantity” are available for purchase closely followed by 44 percent who believe it’s an “average quantity.” When it comes to desirability to purchase, 52 percent believe the quality is average and 28 percent suggest it’s “slightly worse than 2016.”
Markets to Avoid Investments: LIIC members were asked which of the top 25 markets they “would not consider buying a hotel” in, and responded with the following: Houston, Texas (64 percent); Nashville, Tenn. (32 percent); Detroit, Mich. (28 percent); New York, N.Y. (28 percent); and St. Louis, Mo. (28 percent).
Where to buy: Where to buy was unanimously voted as New Orleans, La.
Marriott and Starwood Merger: 36 percent believe that the value of Starwood lodging investments have increased specifically due to the merger. The primary concern stressing 22 percent of hotel owners is decreasing negotiating leverage.