The competition for properties in certain markets is heating up among buyers, as REITs and private equity groups with similar strategic objectives compete for large, high-end hotels in the central business districts of major cities—key areas that have experienced a full recovery from the economic downturn. Although top resort destinations have been a bit slower to recover, there is similar competition, as many of these assets still have considerable earnings and appreciation potential ahead. Internal transaction metrics for the sales mix in the first half of the year show that transfers of hotels over 200 rooms have more than doubled YOY. Transfers of hotels in central business districts and resort locations are up 39 percent, and luxury, upper upscale, and upscale chain scales are up 57 percent. These increases indicate a major shift toward institutional-type quality assets.
Ascending from the cyclical low established in 2009, selling prices are at record highs in the luxury, upscale, upper midscale, and midscale sectors, as well as at center city, airport, and major suburban locations. The average selling price per room YOY rose 28 percent to $150,223 per room in the first half of 2014, compared to $117,300 in 2013. Prices in 2014 also exceeded the year-end 2013 total of $128,352 by 17 percent.
Currently, the three highest-priced markets are New York at $619,154 per room, San Francisco at $383,924, and Miami at $363,294. Though these prices are a useful guideline, investors should recognize that sample sizes are small and valuations are always hotel and location specific.
Transactions in the first half of this year totaled $7.5 billion for hotels that publicly reported a selling price. Because of upcoming projects scheduled to close in the second half, investment activity for the year should be close to the $17.2 billion recorded in 2013.
A complete economic recovery, a forecast for continued steady economic growth, receptive capital markets, and a docile new construction pipeline make it an interesting time for investors. It could be an ideal time to both sell hotels and, conversely, acquire additional assets based on the makeup of an individual investor’s portfolio. It also could be a good time to hold existing assets and seek further improvements to operating profitability and additional asset appreciation. Private equity funds and hotel companies who acquired undervalued assets near the bottom of the cycle, invested to reposition these assets, and assumed the risks associated with awaiting an economic recovery are now close to the end of their holding periods. They are active sellers who account for 60 percent of all selling volume this year. For them, it is an excellent time to dispose of these assets—interest rates are attractive, cap rates are low, and competition for prized assets is combining to produce peak selling prices.
Conversely, publicly traded REITs, which pared their portfolios earlier, have slowed their selling activity. For the last two years, they have been mostly adding recovered properties with stabilized earnings to their portfolios. In the first half of the year, REITs accounted for 36 percent of all buyer activity. A few equity funds with investment objectives similar to REITs are looking for assets with the potential for further development, which often includes a residential component. Similar to REITs, they are planning for a longer holding period.
In 2013, there was $17.2 billion of hotel investment activity among hotels with reported selling prices. Total investment activity increased to $21.8 billion when adding in partial interest sales, estimates for hotels without reported selling prices, and the valuation of corporate merger activity. So far this year, these other property transfers exceeded last year’s pace. As a result, Lodging Econometrics anticipates that total industry-wide investment activity could finish as high as $25 billion in 2014.
Patrick “J.P.” Ford is an SVP of Lodging Econometrics; info@lodgingeconometrics.com.
