First look at full-year transaction data points to continued industry growth

The Country Inn & Suites Atlanta Six Flags in Lithia Springs

The Country Inn & Suites Atlanta Six Flags in Lithia Springs, Ga., was sold by an affiliate of Banyan Investment to Cosmo Ventures, LLC.

The Country Inn & Suites Atlanta Six Flags in Lithia Springs, Ga., was sold by an affiliate of Banyan Investment to Cosmo Ventures, LLC. 

 

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As preliminary figures are reported for 2013, it’s easy to see that the momentum for 2014 is still high, according to brokers and transaction analysts.

“The first half of 2014 is going to be very, very good,” said Steve Kirby, principal of Mumford Co. He said he was hesitant to project too far out because of outside issues, such as economic changes and oil issues.

Suzanne Mellen, senior managing director at HVS, said there is optimism, but everyone wants the uncertainty to go away.

“We now appear to be at the peak, we have a good footing; now there is uncertainty because everyone asks, ‘How long will it last?’ and we’re looking at exceeding prior peak performance.”

Certainly, deals closing in the early days of 2014 came out of 2013’s improving landscape.

“Sales activity continues to be very strong and sales of larger, higher-priced hotels are more robust in the first month of 2014 as compared with the first month of 2013,” Mellen said.

Daniel Lesser, president and CEO of LW Hospitality Advisors, said while major urban markets have become expensive and highly competitive, secondary markets are among the most compelling return on investment in U.S. hotel real estate.

➔ $26.1 billion

The preliminary total U.S. hotel volume transacted in 2013.

Source: Real Capital Analytics

“We’re seeing some robust activity in secondary markets,” he said. “It’s not easy to get deals done in the top 25 markets.”

Portfolio deals also are beginning to build momentum and the expected increasing volume in 2014 will eventually provide transparency for valuation, Lesser added.

Portfolio volume for hotels reached $8.7 billion in 2013, up 30 percent and the highest total since 2007, according to preliminary figures from Real Capital Analytics.

A wide array of buyers will continue to pursue hotel investments, Mellen said.

Preliminary reports for the first quarter of the year from Real Capital Analytics indicate that volume is as strong (and likely to grow as deals are finalized) in 2013 year-over-year comparisons.

Challenges

Mellen said there is definitely a sentiment of cautious optimism, and investors are pretty optimistic about this year. “

But it’s all about when they exit and what it looks like when that happens,” she said. “How long is the ‘up’ going to last, or is it truly sustainable?”

Mellen said in the near-term investors are comfortable, but the uncertainty is about the long term.

“The uncertainty is about the interest rate because no one knows how much it is going to rise, the CapEx risk, and the economic factor for valuation—how long can we go above the previous peak gets factored into the analysis.”

Kirby said there were fewer challenges, however, on the horizon.

“The fundamentals at hotels, the demand increases, will continue, so operators can push rate,” he said. “We’ll see a number of markets have new construction opening, and we’ll see what impact that has in the marketplace. A lot of investment company bankers see competition as a double-edged sword in that it makes a market more attractive.”

Million-dollar rooms

The trend that permeated 2013 is likely to continue in 2014, according to sources.

The million-dollar-plus-per-room pricing is becoming more prevalent than ever before, according to Lesser. He cited four deals in 2013 where pricing reached this level: the London West Hollywood ($975,000 per room), the Setai Fifth Avenue New York ($1.070 million per room), the Park Lane Hotel New York ($1.074 million per room) and Calistoga Ranch in Calistoga, Calif.

“Intuitively, I believe generally that values are up in 2013 over 2012 and are going up in 2014,” Lesser said. “But we have to be careful when speaking in generalities for national numbers.”

Mellen added that the consulting and valuation business still sees refinancing more than selling, so there is definitely potential for growth. There is still the challenge of getting buyers and sellers to connect, she said.

While the per room price tag rose, Kirby said a surprise of the current transaction market is that more of the budget properties are drawing greater interest than during the previous cycle.

“The lodging business has become attractive again versus alternative lower-end real estate investments,” he said.

While a quarter-by-quarter analysis shows that limited-service hotels saw a deal slowdown in the fourth quarter, according to preliminary data from Real Capital Analytics, it was noted that there also was a slowdown of portfolio deals in the fourth quarter, which could contribute to this decrease in year-over-year comparison (a 32-percent drop over 2012 4Q).

Kirby said in some cases near the end of the year it makes sense to opt to close in the next calendar year so the deal can carry the depreciation of an extra year if the property is carrying a loss on the books. This could lead to an uptick in the first months of 2014.

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