The Lodging Industry Investment Council (LIIC) released its annual survey of the think tank’s members and developed a list from the results that highlight major hotel investment opportunities and challenges for the coming year. More than half of the hotel investors surveyed (53 percent) reported successfully purchasing a hotel in the last 12 months and 40 percent currently having a hotel acquisition candidate under a purchase and sale contract. Moreover, 93 percent say they hope to buy lodging assets over the next year and 75 percent plan to sell a hotel over the next 24 months.
Below are 10 trends and challenges that hotel investors expect in the next year.
1. Fluid Hotel Transaction Market
Overall, the 2018 LIIC Survey indicates “business as usual,” and the big picture trend is that the current market is similar to 2017. On the positive side, the hotel transaction market is fluid—hotel assets are trading. Buyers and sellers are actively using solid hotel debt availability in a variety of forms to complete transactions. Private equity and listed REITs are predicted to dominate the purchase of upscale to luxury hotels, while small private buyers and regional owner/operators are projected to dominate the purchase of economy to upper-midscale hotels.
2. Tax Reform’s Benefits to Owners
How will the recently passed tax reform bill affect hotel owners? Most investors (67 percent) say positively, with 41 percent expecting an increase in GDP growth and 28 percent predicting a correlated increase in business travel. For the next 24 months, 70 percent believe that the economy will continue to trend upward.
3. Hotel Property Values Flat or Increasing Slightly
Over the next 12 months, 41 percent of hotel investors anticipate that lodging real estate values will be flat in comparison to 2017. However, the same size group (41 percent) forecast a slight increase in values (up to 5 percent). Buyers’ favorite investment sector targets include upscale (37 percent) and upper-upscale (37 percent).
4. New Lodging Supply
The majority of LIIC members (78 percent) cited new hotel supply as the current top investment concern.
5. Increasing Interest Rates
With interest rates increasing gradually—up to 100 BPS over the next 12 months—investors say sellers need to understand the impact of rising rates on asset pricing for hotels they are looking to sell.
6. Limited Availability of Labor
About half (49 percent) of LIIC members are worried about how rising labor costs and the availability of quality employees will impact hotel net operating income (NOI). That’s up from 26 percent in 2017. Seventy-eight percent believe their hotels have been negatively impacted by the low availability of qualified employees.
7. Shifts in Hotel Transaction Volume
Thirty-five percent of members forecast a decrease in the total dollar volume of U.S. hotel transactions in 2018 relative to year-end 2017, and 27 percent believe volume will be flat. However, 29 percent forecast dollar volume to increase up to 10 percent. The total number of assets forecasted to be sold by year-end 2018 is evenly mixed and inconclusive—32 percent down, 30 percent flat, and 29 percent up.
8. Refinancing vs. Selling
Investors believe (67 percent) that increasing mortgage interest rates will have a slight impact on values, increasing overall cap rates up to 50 BPS. Multiple LIIC members believe, in general, the market is still better for refinancing than selling. In action, 55 percent have recently elected to refinance instead of selling over the last year. Today, 49 percent believe the ideal refinance window has closed, but 37 percent still believe the window is open, with 68 percent of owners saying that they are “very likely” to refinance in the coming 12 months.
9. Slowing New Hotel Development
Sixty percent of LIIC members believe it is still a good time to develop more new hotels, “if you are selective about product and markets.” Respondents are putting their money behind their votes—81 percent of relevant LIIC members have new hotels actively under development. Sixty-three percent do not believe it has become more difficult to secure construction financing. Still, 38 percent expect to soon see a 2 percent to 4 percent increase in construction costs driven by tariffs on imported steel and aluminum.
10. Low Quality and Quantity of Hotels for Purchase
Half of the investors surveyed believe that a “below average quantity” of hotels are available for purchase, closely followed by 25 percent who believe an “average quantity” is available. In terms of quality (defined as desirability to purchase), 41 percent believe the overall quality of assets on the market is slightly worse than 2017, and 41 percent believe quality is stagnant with last year.
LIIC members also named the top 25 markets where they “would not consider buying a hotel.” Those markets included Nashville (33 percent wouldn’t consider buying here, up from second place last year); St. Louis (32 percent, up from fifth place); Detroit (30 percent, remains in third); Norfolk/Virginia Beach (24 percent, up in the top five); New York (19 percent, dropping from 4th place). Alternatively, members agreed that Denver is a market where they would consider buying a hotel.
LIIC has been surveying its members—who represent investors, lenders, corporate real estate executives, REIT’s, public hotel companies, brokers, and significant lodging equity sources—for over a decade to gauge the current investment sentiment and attitudes in the lodging industry. Altogether, LIIC members represent direct acquisition and disposition control of more than $40 billion in lodging real estate.
Mike Cahill, CEO and founder of the Hospitality Real Estate Counselors (HREC) and LIIC co-chairman, produced this year’s survey. Alexander Cammarata and James Few, associates in HREC’s Denver office, assisted throughout the process.