By Marc Stephen Shuster and Jeffrey R. Margolis
During 2014, the global hotel industry continued to see increases in rates and revenues and, as a result, 2014 was a busy and challenging year for hotel transactions. Although some markets have not yet fully recovered from 2008’s global recession, the hotel and hospitality market continues to be one of the strongest in the U.S., with the hotel sector leading all property types in price gains. Transaction activity during 2014 was strong, with buyers competing heavily for the limited amount of assets for sale and sellers seeking to monetize their investment gains. High investor interest continues to put downward pressure on capitalization rates, driving up hotel values to peak levels.
Conditions are ideal for another strong transaction year with investor optimism continuing to grow. Hotel investors opened the throttle on deal pace during 2014, and activity during 2015 is expected to equal or exceed that of 2014 with high investor sentiment for trading. Driven by positive hotel operating profits, hotel investors remain confident and optimistic about the outlook for hotel investments and continued lodging sector growth. Compared with stocks, bonds and other investments for which some of the brightest minds are sounding the alarm about a bubble, commercial real estate is viewed as a good investment with high values. In addition, perceiving real estate in the United States as a safe long term investment, acquisitions of hotels and high-end real estate by foreign investors continue to be on the rise, and the volume of cross-border capital should continue to remain steady or increase.
Within the commercial real estate sector, hotels offer a lower risk investment, or an arbitrage hedge, against future rising interest rates, which industry professionals indicate will inevitably occur. Although possibly at a slower rate, hotel values should continue steady growth driving down cap rates to historically low levels. With modest increases in average daily rates, net operating income will grow at a faster pace than predicted interest rate hikes. The fundamentals remain strong as significant capital is available in the sector, access to capital continues to improve, debt continues to flow into the market, investors move forward, and the major markets have good underlying fundamentals.
Within the market for hotels, core cities which attract tourists such as Miami, Orlando, New York, San Francisco and Phoenix should continue to dominate the buyer’s market as such cities continue to see an increase in tourism. In addition, primary and gateway markets, which lead the strong performance in this sector, should continue a steady pace of deal activity in the hotel investment arena. In addition, markets that have been less active will likely see increased activity including Dallas, Houston, Atlanta, Seattle, Chicago and Philadelphia. Assets in secondary and even tertiary markets such as Fort Lauderdale and Charleston will likely garner more interest as prime assets in gateway cities reach peak valuations.
Among the hotel asset class, there is high investor interest among select-service hotels and luxury full-service hotels, with high barriers to entry keeping supply increases low and demand high. With the clarity of the expense profile and the margins these properties produce, select-service hotels, which keep operating costs down by offering services and amenities in moderation, are in demand by investors. With the luxury travel sector on the rise and experiencing year-over-year growth, full-service, upper upscale luxury properties are investors’ “trophy” properties which offer value separate from the real estate of which they are a part.
Overall hotel investment and operating fundamentals are poised to remain strong in 2015 which should bring new hotel acquisition opportunities, new conversion acquisition activities, new hotel management opportunities, new hotel lending opportunities, and new hotel development opportunities.
