Latest Hotel Advisory Reports Suggest Next Year Back to Pre-Recession

Several hotel advisory sources report acquisitions and lending has risen. Buying and financing of hotels is expected to continue and show even stronger growth next year. Hotels have now joined other real estate sectors, such as industrial and senior housing, as the hot markets for investors. Limited new supply has also allowed existing properties to enjoy increased occupancy and average daily rates thus making them more attractive investments for the long term. Several aspects from an investment perspective are note worthy from these recent lodging reports: The lack of financing and all cash buys by institutional funds has made it difficult for the smaller hotel investor to drive more single hotel sales in our opinion. However, and according to the National Real Estate Investor report by Jones Lang LaSalle in its latest hotel advisory, the combination of hotel occupancy at 2006 levels and buy-sell transaction in excess of $14 Billion has created a renewed interest by lenders to get into the hospitality sector. This is potentially good news for high net worth investors, family offices and smaller real estate partnerships who buy individual lodging assets yet need financing to leverage these investments. One segment of the lodging sector that is in high demand is select-service hotels. JLL also cites research from the “MMGY Global 2013Portrait of American Travelers, which states that decreased demand for extra amenities and luxurious services by leisure travelers in the U.S. has resulted in a 55 percent increase in select-service hotel accommodations. Select-service hotel rooms reportedly make up more than half of all U.S. hotel rooms, with more than 2.8 million in operation.” However, hotel investment advisors such as JLL are also suggesting more of the select-service hotel product will hit the market this year and next. This in turn could start driving down values which is bad news for sellers. Independent and non-branded hotels, especially the boutique segment, have come full circle in the last decade and are enjoying more investor interest. Unlike in years past, non-branded hotels have proven their ability to compete with branded hotels in part because of the Internet and Social Media exposure. Still, this is predominately in the major urban and inner city markets. But, smaller secondary cities are starting to see this segment grow in consumer interest, particularly among the millennial generation who seek out more trendy, non-traditional lodging stays. However, the independent and non-branded hotel segment only enjoys about 15% of the financing normally provided. Lenders still see more risk in not having a major flag and many investment portfolio holders report higher returns among brands and franchises. This may be a signal we are soon to be peaking in the buy-hold-sale cycle in 2014, which suggests new development and construction starts will surely follow. According to the 3rd quarter 2013report by Lodging Econometrics, new construction is up over 25 percent in the number of hotel projects and hotel rooms respectively. LE is also predicting a year-over-year increase in new hotel construction starts of 17 percent. There are already signs from several large chains that own and operate hotels and resorts to move toward an asset-light strategy. Meaning – these lodging companies will focus on hotel management agreements to operate their properties while divesting themselves of owning the real estate portion in their portfolios. A combination of more supply and non-operator buyers of domestic hotel real estate could drive demand for more hospitality management services here in the USA as well. The growing sophistication of independent owners and this segment overall will add to the greater need for operators that understand the needs of providing service to individual owners. These hotel and resort owners expect and place a higher importance on well run, hospitality driven operations – not just achieving certain IRR and Cap rates, like institutional investors, REITs and Wall Street funds. If I were to sum up the take-away from the latest hotel advisory reports, the first would be to buy or build now with a focus toward an independent and non-branded hotel if you are a smaller owner or investor group. The second would be to factor in a longer hold of at least seven to ten years based on prior ups and downs in the hotel cycle if it is your attention to eventually sell.