Transactions

In brokers' world, solid fundamentals are pushing higher pricing

20 Mar, 2013 By: Elaine Yetzer Simon
 


 

Jones Lang LaSalle arranged the sale of the Atlanta Marriott Marquis for $293 million.

The hotel industry is experiencing continued improved metrics—occupancy, average daily rate and revenue per available room have all experienced increases every month since April 2010—which in turn has boosted hotel pricing. Tony Muscio, SVP of Jones Lang LaSalle’s Hotels & Hospitality Group, said pricing is getting closer to the peak and in some instances is surpassing it. “On a national basis, the average transactions price per room for single-asset trades peaked in 2006 at $227,000,” he said. “Average pricing decreased to $137,000 in 2009, and has since rebounded by over 30 percent to reach $179,000 per room in the U.S. in 2012.”

Steve Kirby, principal with Mumford Co., said the increase is slow but steady and started in 2012. “We’re not seeing people rush back in, but everybody sees the trends are positive and wants to be in the front end of that as opposed to the back end,” he said. “We will get back [to the peak] eventually. I still think we are a couple to three years away. ”

Gregory LaBerge, national director, National Hospitality Group for Marcus & Millichap, said that while he believes the industry will regain the peak numbers by 2017 if not sooner, he’s not in any hurry for that to happen. “What we saw in 2006 and 2007, I don’t even want to get back to those prices,” he said. “It was such an anomaly in the industry and caused a lot of heartache and pain after that cycle. ”

Influencing Factors

Hotel pricing depends on the asset and specific market it is located in, Muscio said. “Certain primary markets are back to peak performance or better, which is helping to push specific hotel performance and pricing to peak levels,” he said.

He said strong areas of the country include New York, Miami, Chicago, San Francisco, Los Angeles, Houston, Honolulu and Washington, D.C.
LaBerge said Phoenix has had a rough few years, but people are starting to look at it again.

As far as type of products that are selling for the most money, Kirby said properties in the mid-tier family with a solid loyalty program, especially if located in a top 25 market, command a premium.

Lack of construction has had a major impact on hotel prices and hotel performance, according to LaBerge. “Because of the lack of interest and maybe risk, we just haven’t had any [new] supply,” he said.

The supply issue has allowed hotels to push their pricing, according to Kirby, but he expects that to change some. “We’re going to have some better brands entering the market and pushing some of their own older product out or we might even see some new branding over the next year or so,” he said.

Financing is another big issue that is affecting transactions. “Local banks are much more healthy and stable than they were a couple years ago and for better-quality customers they’re making conventional loans,” Kirby said.

Because the hotel industry continues to show its relative strength, former players and new players are being attracted to the sector. “We’re seeing some of the Wall Street players move back into the arena because we’re seeing increases in occupancy and ADR and thus RevPAR,” Kirby said.
LaBerge said that apartment occupancies  are at all-time highs and as a result, with low interest rates, many people bought apartment buildings. But this combination has compressed cap rates and people in the apartment sector aren’t making money anymore.

Trailing cash flow, hotel brand or availability to rebrand, leasehold versus fee simple, hotel management or availability of management and other encumbrances also are affecting prices, Muscio said.

Bid-Ask Gap
The gap between buyers and sellers has been an impediment to sales for years, but that gap isn’t as much of a factor in today’s marketplace, according to the brokers. “The buyer-seller gap is coming together and you’ll see more transaction volume because of that,” Kirby said.

LaBerge agreed that the gap has reduced significantly and that in most cases today, if you’re a seller you are selling for a reason or to solve some type of problem. “Given that we are only a few years removed from some of the lowest values we’ve seen, you’ve got sellers today that understand where the market has come up to,” he said.

Looking Forward
Muscio expected continued level of transactions in primary markets and increased activity in the resort space. “Americas hotel transaction volume for the year is expected to surpass the $17.5 billion that 2012 netted, with a moderate increase to $18.5 billion,” he said.

The industry will continue to see higher numbers of sales and the increased availability of financing will fuel more sales, according to Kirby.
Another source of transactions will be the result of whole portfolio sales, according to LaBerge. “When you have entities that buy large portfolio deals, one of the natural byproducts is they’re going to be spinning off some of their dogs,” he said. “Once they get their arms around the transaction and the portfolio and they look at how some of those key assets fit into their overall strategy, some of them just don’t fit their strategic strike zone. That will drive transaction flow on a one-off basis.”

Topic : Hotel Brokers
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