National Report – The strong hotel transactions market the industry experienced in 2014 is expected to continue throughout 2015, and that should be music to buyers’ and sellers’ ears.
According to Greg LaBerge, national director of Marcus & Millichap’s national hospitality group, figures show that, when year-end numbers are compiled, there will have been around 1,600 transactions worth nearly $35 billion in 2014. That’s an increase of more than 20 percent in the number of transactions over the previous year, he said, citing Real Property Analytics.
“I think 2015 is going to be somewhat of a monumental year for the industry in terms of investment sales,” he said. “Prices will continue to increase this year, so it’s going to probably translate into a 30-percent increase in sales volume.”
Others are not quite as bullish.
Andy Broad, partner with Hotel Assets Group, predicted 2015 to be a decent year for hotel sales. “It’s going to be balanced in terms of being sort of a buyers’ and sellers’ market still; maybe a little bit more of a sellers’ market, considering how many people are chasing product,” he said.
Steve Kirby, principal with Mumford Co., said he expects the transaction market to be on par with last year. “I don’t think you’re going to see a 20-percent volume increase, but you may see 5 percent or you might see a little fallback,” he said.
WHO AND WHERE
Regardless of the final outcome, all three brokers agree on what the most sought-after properties will be in 2015: select service.
“When you look at the chain scales, select service continues to be the dominant darling of the industry,” LaBerge said. “They’ve got great profit margins, great dynamics, great revenue growth, great locations; hence, they’re sought after by a huge amount of the investor pool and there just aren’t enough of them out there in the market.”
According to Kirby, select-service and midmarket properties are stable assets, which account for much of their popularity. “You can buy a dozen of those for what you might pay for one of the trophy-type assets,” he said. “You’re spreading your risk, but branding is the key here. They should have stable performance and, if there’s some softness at one or two properties, you don’t have the impact of a downturn.”
Broad said those assets will always have a place in the market. “If someone wants to sell them and is willing to sell them at market value, they’ll be sold,” he said. And who will be doing the buying in 2015? It’s a mixed bag, according to Broad. “We certainly see the [real-estate investment trusts] still in play, there are some private equity groups that have been very active, we’ve seen some private family players,” he said. “We’ve seen some Asian money coming into play.”
LaBerge agreed that international players are becoming more of a force in the industry. “One of the things we absolutely are seeing is more and more foreign capital coming into the United States and into the industry,” he said. “A lot of that is flowing into three key areas: the East Coast, specifically New York; the West, in areas like Seattle, Portland and Northern and Southern California, where there are large Asian communities; and Florida, with money coming in from South America.”
In general, capital markets are continuing to get better with financial availability for the hotel industry, according to LaBerge. “One has made an argument in the past that dollars are available if you have a branded hotel in a great market,” he said. “We continue to see, every day that passes, those parameters widen a bit. Not to the point of irresponsibility, but from the perspective of recovery, lenders are feeling more comfortable lending in markets that they previously might not have.”
While 2016 is still many months away, LaBerge, Kirby and Broad offered some predictions for the year.
LaBerge foresees a slowdown in transactions next year. “What’s going to drive the vast majority of the dynamics and results of 2016 is going to be increased interest rates,” he said.
Those rates will affect prices as well as the number of transactions, LaBerge added. “When you’ve got a rising interest rate environment, all else being equal, that cost of debt requires you to pay less for the asset than you otherwise would to achieve the same yield,” he said. “If we’ve got a rising interest rate environment and the operations that played themselves out—where we’re now starting to see some impacts of supply across the country [and] we’ve got some slowdown in growth on the RevPAR side—it’s reasonable to expect that the transaction velocity will slow down a bit.”
According to Kirby, there will be more opportunities for buyers in 2016. “[Next year] is going to be a huge year for loan maturities,” he said. “There may be either a lot of refinancing activity or there may be a lot of transaction activity.”
According to Broad, the landscape will shift to some degree from being a sellers’ market to being a buyers’ market in 2016.
“It’s going to stress the CMBS market and result in wider spreads on loans, so probably slightly higher interest rates,” Broad said. “We’re going to see sort of an influx of product as those deals that have loan maturities coming due inside of a year hit the market for sale. Others who have major deferred capital requirements, [and] who can’t refinance both the current balance of their note and the PIP, maybe a sale becomes an option for them.”
Kirby also predicts that, while there will be some new supply opening in 2015, the larger volume of new hotels will open in 2016.