Today’s hotel market offers an interesting dichotomy, with meaningful opportunity for both buyers and sellers. Significant overhang from the economic downturn continues to exist, providing a very large inventory for buyers seeking transitional assets; and, with industry fundamentals strong and growing, sellers with well-positioned, cash-flowing assets are also in a favorable position.
Buyer Benefit: Transitional Assets
The economic downturn created a powerful position for buyers with liquidity and the ability to add value. Today, many assets are still floating in the market and have not received the adequate reinvestment capital needed to change their competitive position. This includes, for example, properties in need of renovation, or overleveraged assets that have broken capital structures.
Transitional hotel assets can be renovated and/or rebranded at an all-in basis below replacement cost in most markets—especially full-service assets—as it still costs more to build than to buy and resuscitate. Renovating the asset and reintroducing it to the market, usually with new management and a reinvigorated operational team, when fundamentals are strong will accelerate the ramp-up, thereby creating value.
Many successful investors have capitalized on this strategy, purchasing neglected hotels, renovating and reflagging them to align with the market conditions and raising the average daily rate. Additionally, many investors are considering the millennial influence and are transforming transitional assets into hotels with desirable amenities in up-and-coming locations.
While lending markets continue to gain strength, it still remains difficult to secure financing for struggling hotels, opening a door for investors and owners with available funds and resources to acquire assets and reposition them. The market continues to provide ample investment opportunity due to the numerous owners who are unable to reinvest in their assets, lenders now willing to act and brands losing patience with underperforming hotels that no longer meet brand standards.
Seller Benefit: Cash-Flowing Assets
Hotel fundamentals continue to improve with demand at an all-time high—revenue per available room rose more than 5 percent in 2013 and is projected to increase 5 to 6 percent in 2014. Meanwhile, supply remains constrained, growing less than 1 percent in 2013, with demand outpacing supply. This leaves well-positioned, cash-flowing assets in an attractive selling situation.
Significant capital is searching for cash flow to replace anemic fixed-income returns, including real estate funds, private and public REITs and high-net-worth buyers. The transaction and lending market is improving, but investors are especially yield sensitive, resulting in capital chasing cash-flowing assets—good hotels that are well-positioned and well-located.
Interest rates are low with favorable terms for these deals, with relatively low capitalization rates, making timing prime for sellers before interest rates begin to rise, taking capitalization rates with them.
It’s true that now is a favorable time to be in the market as both a buyer and a seller, but the circumstances are very different for each.
But for each side, if you are in either of these camps, you are in a strong position: 1) A buyer with liquidity and the ability to add value and 2) A seller with a well-positioned cash-flowing asset.