Lodging Enters Expansionary Phase of Real Estate Cycle

In 2013, the lodging industry reached an estimated total investment of $21.8 billion, the highest level since 2009. This is expected to accelerate higher in 2014 and into the late decade. For 2013, 1,171 hotels were sold or transferred, a decrease of 19 percent year-over-year (YOY). In 2007, total transactions and property transfers peaked at 3,218 hotels and 441,613 rooms, then fell to 528 hotels and 60,804 rooms in 2009. After rebounding a bit in 2010 to 1,358 hotels, total transaction volume has been locked in a bottoming formation with little mergers and acquisitions activity.

Of the 1,171 property transfers last year, 775 were individual single-asset transactions, an 18 percent YOY increase. Another 395 were portfolio transactions, which decreased 49 percent YOY. Merger and acquisition property transfers were of no significance in either 2012 or 2013. In 2013, 898 hotels had a selling price reported into the public domain. For those hotels, the average selling price per room at $132,955 soared to the highest level ever recorded. Selling prices per room ratcheted upward 18 percent YOY because of low capitalization rates, improved profitability, attractive interest rates, and a larger number of upscale hotels in the sales mix.

Sales activity totaled $16.8 billion in 2013 for all hotel transactions with a reported selling price. Privately held equity funds and hotel companies accounted for 62 percent of sell side activity with a combined $10.4 billion. On balance, they were net sellers within their respective portfolios as they implemented exit strategies for assets acquired or developed previously. Publicly traded real estate investment trusts (REITs) followed with 18 percent of the sales activity equaling $3 billion. On the buy side, publicly traded REITs accounted for 30 percent of buying activity with $5 billion recorded and were net purchasers of lodging real estate for their portfolios. Privately held equity funds with $4.5 billion and hotel companies with $2.5 billion were also heavy buyers accounting for 27 percent and 15 percent of buying activity, respectively.


The recovery leg of the new lodging real estate cycle is near conclusion. It is characterized by near record low interest rates, a rebound in operating metrics, and solid gains in earnings. The end of the recovery phase is proving to be a favorable time for private investors to sell and take profits on assets acquired during the recessionary lows that are now performing at higher levels and are near maturity.

Now that we are near the end of the recovery phase and entering into the expansionary phase of the lodging real estate cycle, investors see even greater opportunity ahead. Steady economic growth should increase guestroom demand and provide greater pricing opportunity. Profitability should continue to improve since the construction pipeline will not produce significant new supply additions until later in the decade. Single-asset transactions should begin to accelerate. Look also for an increase in portfolio and mergers and acquisitions volume as Wall Street becomes reenergized and the lodging industry begins to consolidate. It is an opportune time to be an investor. There should be attractive returns and capital appreciation available over a typical five-to-seven-year holding period for assets purchased today.

Patrick “JP” Ford is an SVP of Lodging Econometrics; info@lodgingeconometrics.com.

Photo caption: Hersha Hospitality Trust closed on the sale of Hotel 373 in midtown Manhattan for $37 million in April.