Economic Trends

Brokers expect steady transaction pace in 2013

27 Dec, 2012 By: Elaine Yetzer Simon Hotel and Motel Management

The hotel industry is working hard to bring itself out of the hole it has been in the past several years, and brokers are looking at 2013 as the year that transactions finally start to sustain some momentum.

David Donley, president of CRES Hotel Brokers in Cape Girardeau, Mo., said activity for his company picked up in the fourth quarter of 2012 and he looks for that to continue in 2013. "We're looking for the traditional transaction along with troubled hotel properties to continue to gain volume," he said, adding that investors willing to pay two to three times room revenue for a hotel will be active buyers in 2013.

Hotel AG was scheduled to close 76 hotel transactions in 2012 and already has a leg up on 2013. "We have 282 hotels on the market with 97 of the 282 under sale agreements," said H. Keith Thompson, principal of the Stockbridge, Ga.-based company. "The total value of the 282 hotels is $2.6 billion. We have closed one hotel transaction every day for the past 28  months and expect this level to only increase over the first three quarters of 2013." Thomson added that many of those transactions were portfolio deals.

Steve Kirby, principal with Mumford Co., said he doesn't think the industry will see big increases in value until 2014 or 2015, but does predict transaction growth. "We are forecasting a steady increase, no quantum leaps," he said. "We're seeing a lot of continued buyer interest. We're seeing a lot greater investor interest [(and)] lender interest. Year 2013 is going to be a good year barring any unforeseen cliffs or other things that might arise."

Mumford's number of transactions per year has been tracking upward since 2009 and Kirby said he is very pleased with the trend. The company is based in Newport News, Va.

The Players
So who is expected to be involved in all of this buying and selling? Real estate investment trusts, for one. "We expect that the REITs are going to be active both in buying and selling," Kirby said. "Some are going to be pruning some of their less-core-type assets but also buying, basically upgrading their portfolios."

Kirby also expects individual owner-operators and regional companies to be involved during 2013, as well. The year could start out with a bang, according to Thompson. "There are several transactions happening first quarter 2013 that will set the pace and value factors for the year," he said. "We believe the largest buyers in 2013 will be the private investment funds and existing hotel REITs."

Donley said the properties he expects to see for sale will be ones that didn't fare too well during the downturn, but hung on and now are seeing some positive performance. "The owners that will be selling this year will be ones that their whose ADRs and occupancies in certain markets that saw some improvement and will see their room revenue coming up and will be in a position to sell now," he said. "Over the last two or three years they've been kind of underwater and weren't in a position to get the amount of money they needed from them."

What and Where
As always, there are certain markets that are hotter than others and certain types of properties that are more in demand. "The hottest investment segment today and what we foresee for 2013 is the upper-tier select-service products, mostly in the Marriott, Hilton and IHG brand families," Thompson said. "We are seeing great compression from pricing and timing in these segments. Most investors are averaging age and yield to put together a portfolio that blends the youngest product with the best portfolio yield."

Donley said he expects economy to midscale-without-food-and-beverage hotels to increase in transaction volume in 2013, especially those in the $1-million to $10-million range, while Kirby said there's higher buyer interest and activity in newer, better branded properties.

Location is key with any real-estate deal, and the largest markets are still the center of transaction activity. "We are seeing the public investing in the top 100 markets where the asset being purchased is the top hotel in that market's fill pattern," Thompson said. "When you get outside of the top 25 MSAs, there is great yield with new product that will stand the test of time as well as a sound exit strategy from a price-per-room perspective."

Kirby agreed that the focus of activity hasn't changed and probably won't in the future. "The top 25 ([markets]) are very good, they continue to be good and will always continue to be good," he said. "The secondary markets, as we see improvement in job growth and a decline in unemployment, then you'll see values increasing in those markets."

Tertiary markets are going to be slowly dragging behind, Kirby said. "In a lot of cases, the tertiary markets are the last to be impacted and the least impacted, but that's not been the case in this cycle," he said. "That's because of the huge loss of jobs."

Donley, who is licensed in Missouri, Illinois and Tennessee, said he expected two cities in his market to perform better in 2013, increasing their potential interest to buyers. "I look for the Kansas City and St. Louis markets to increase in ADR and occupancy," he said. "Those markets have been kind of soft but they are picking up. I look for those markets to do really well."

Funding Issues
Kirby said lenders are already moving back into the hotel industry, drawn by the higher performance numbers. "As lenders see results, they're going to be more willing to put more money into those types of assets," he said. "You're going to see that more on the debt and the equity side."
According to Donley, who specializes in hotel sales of $1 million to $10 million, that size of transaction often takes advantage of the Small Business Administration 7(a) and 504 loan programs, which limit the lenders' liability in most cases.

"The conventional lender for the hospitality segment has been very tentative with loaning traditionally without large down payments ([and they require)] stricter qualification parameters, but we're starting to see that slack up some," he said. "In 2013 we will see some more conventional loans but the majority of the loans will continue to be done by lenders that are getting the SBA guarantee."
Smaller lenders and community lenders are still lending off relationships, according to Donley, and that type of activity will continue to be strong in 2013.

Topic : Hotel Broker

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