There’s no doubt it’s a good time to be a seller of hotels. The average selling price per room year-over-year (YOY) catapulted 28 percent to $150,223 per room in the first half of 2014, compared to $117,300 at the same time last year (Chart 1). Prices in the first half also increased 17 percent over the year-end 2013 total of $128,352.
Buyer competition is intense, as real estate investment trusts and private equity groups with similar investment objectives compete for the larger, high-end hotels in central business districts (CBDs) of major cities—most of which have now fully recovered economically. The competition is similar for hotels in the top resort destinations, which have been a bit slower to recover. Subsequently, these assets still have substantial earnings and appreciation potential ahead.
Internal transaction metrics for the sales mix in the first half show that, proportionately, hotel transfers larger than 200 rooms have more than doubled YOY. Transfers in the luxury, upper-upscale and upscale chain scales are up 57 percent and hotels in CBDs and resort locations are up 39 percent. It’s a significant shift toward institutional type quality assets.
Ascending from the cyclical low established in 2009, selling prices are at record highs in the luxury, upscale, upper-midscale and midscale sectors and at CBD, airport and major suburban locations.
The three highest priced markets in the first half are New York at $619,154 per room, San Francisco at $383,924 and Miami at $363,294. Although a useful guideline, investors are cautioned that valuations are always hotel and location specific and sample sizes are small.
SELLER AND BUYER ACTIVITY
For hotels with a selling price reported into the public domain, investor activity in the first half totaled $7.5 billion (Chart 2). When reviewing the upcoming projects scheduled to close in the second half of 2014, it is anticipated that investment activity for the year should be close to the $17.2 billion reported for 2013.
A complete economic recovery, a forecast for continued steady economic growth, receptive capital markets and a docile pipeline make it an interesting time for investors. Depending on the makeup of their portfolios, it could be an ideal time to be both a seller of hotels, or conversely, an acquirer of additional assets. It could also be opportune to hold existing assets seeking additional asset appreciation and operating improvement, too.
➔ Internal transaction metrics for the sales mix in the first half show that, proportionately, hotel transfers larger than 200 rooms have more than doubled YOY.
Private equity funds and hotel companies who acquired undervalued assets earlier near the bottom of the cycle assumed the risks associated with the economic recovery and provided additional investment for the repositioning of their assets. They are now close to the end of their holding periods and are active sellers accounting for 60 percent of all selling volume in the first half of 2014. It’s an excellent time to dispose of these assets. Interest rates are attractive, cap rates are low and competition for prized assets combine to produce selling prices at peak levels.
Conversely, publicly traded REITs, having trimmed their portfolios earlier, have slowed their selling activity. Over the last two years they have been mostly adding recovered properties with stabilized earnings to their portfolios. REITs accounted for 36 percent of all buyer activity in the first half. A few equity funds with investment objectives similar to REITs are looking for assets with further development potential, which may often include a residential component. Like REITs, they, too, plan for a longer holding period.
In 2013, there was $17.2 billion of hotel investment activity with reported selling prices. Total investment activity increased to $21.8 billion when partial interest sales and estimates for hotels without reported selling prices was considered and the valuation of merger activity was added in.
During the first half of 2014, these property transfers exceeded last year’s pace. As a result, Lodging Econometrics anticipates that total industry wide investment activity could finish as high as $25 billion in 2014.