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The latest lodging reports by hotel industry expert firms in the brokerage sector who specialize in selling hotels in this business point to an ideal mix of strong investor interest and sluggish growth in any new hotels being built. This is especially true in California where buying hotels is once again the hot investment sector over other commercial real estate types such as apartments and office buildings. Recent news reports suggest that California is coming back and strong hotel real estate sales in the Golden State are predominately in the counties of San Diego, Riverside and Los Angeles. The uptick in occupancies and average room rates is also driving renewed investor interest according to this recent study on sales and demand as reported by a hotel investment advisors and real estate brokerage firm in the Los Angeles Times. Several key factors stated in the study that are influencing the selling and buying of hotels here include: Money from Asian investors especially from China is pouring into California. However, these same Chinese buyers are looking for hotel investment opportunities primarily in the key international cities of Los Angeles and San Francisco respectively. Southern California markets such as West Hollywood and Santa Monica lead the list of choices in where to buy for many buyers. San Diego’s downtown market is also getting a lot attention and would be second on the list along with coastal areas such as Monterey. Another factor is making investing in hotels a good choice if you plan to buy a hotel in the USA market at least for now. That is, hotel owners can relax and take solace because the current and projected new hotel construction pipeline remains low by historical standards. The early planning for new hotel projects is also down over 20% according to the hotel industry expert firm who released the latest Lodging Econometrics forecast. In other words, supply does not appear to be keeping up with demand as the economy does improve and room prices climb. However, several issues brought out in this report when looking ahead do remain troubling. These include: Consumer spending and high unemployment are still a problem and the overall economy has not completely recovered to pre-recession levels yet; Both the White House and U.S. Congress continue to take a do little and often nothing approach, which has stymied any real confidence for investors who are looking at the long term; All of the indicators suggest the lodging real estate cycle in terms of new growth and construction may be prolonged another two years because of the severity of this last recession unless developer activity starts to accelerate once again; and lastly, Most new growth are among mostly small hotels under a couple hundred rooms and those that are less complex lodging real estate assets, such as economy brands, that can be easily financed by community banks. Summing it all up in regards to the demand for existing hotels and new construction growth, and if you are a first time hotel investor or looking to add more lodging assets to your portfolio, we see several opportunities and pitfalls to be aware about: The hotel real estate investment cycle is typically 7 to 10 years. If you are in a long term hold, then this cycle appears that it will last another 5 plus years until new hotel supply catches up and overbuilding starts again. Lending is still tight. All-Cash or 40% to 50% Equity is the norm for many deals right now. Hotel investor interest is growing, especially among private equity groups. Avoid chasing any distressed hotel deals because prices have risen. Many of the banks have worked out their non-performing loans or found buyers for the notes already so there are few opportunities left. If you are looking primarily at hotels in California, look at secondary cities and markets such as Sacramento and San Jose. San Francisco has limited opportunities and too many barriers to entry from our experience as a hotel industry expert based here unless you are an institutional investor.
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