The hotel industry has enjoyed a robust transaction market during the last year marked by a high volume of large portfolio deals. JLL reported transaction volume up 19 percent in 2014 to $26.2 billion, with portfolio deals comprising nearly 30 percent of the total. Strong industry fundamentals, healthy debt markets, an abundance of equity capital and a demand for cash-flowing assets have driven the market to date and should continue to do so in the near-term.
Strong operating performance in February 2015 has benefited both buyers and sellers. Improved industry topline performance, including RevPAR growth of 8.3 percent in 2014, has helped assets held through the downturn put substantial cash flow in place, creating an attractive opportunity to realize the investment for sellers. At the same time, high demand paired with modest supply growth, well below the historical average of around 2 percent, has provided buyers with confidence that assets will continue to perform upon acquisition and provide ongoing upside.
The debt market has also been a major source of transaction volume as banks, life companies and the CMBS market have all been active. A more competitive debt market, paired with the ongoing low-interest-rate climate, has allowed buyers to more readily achieve their levered return targets.
For buyers with the capital and sellers with the product, portfolios have proven an efficient mechanism for transacting. With portfolio transactions playing an important role in the transaction market, the art of portfolio construction has evolved as knowledgeable sellers tailor their portfolios to meet key buyer demand criteria. In addition to cap rates, purchasers are focused on cost per key, discount to replacement cost, asset age and required capital investment.
One industry trend that has remained a consistent facilitator of transactions is the fact that many hotel owners do not properly reinvest in their assets. Sellers who don’t have the capital or desire to reinvest provide the opportunity for buyers to underwrite upside with the right reinvestment. This trend occurs in both up markets and downturns and thus these opportunities still exist today.
While there is evidence that some of the tailwinds propelling the industry may subside in the near future—higher interest rates, supply growth—the transaction market appears poised for continued health. For buyers, even with interest rate increases, rates will still be historically low. For sellers, the spread between interest rates and cap rates is large in a historical context and that gap should compress before cap rates move north. And while supply will likely grow, additions vary greatly by market and growth remains modest relative to historical levels.
As a result, whether you are a buyer, a seller or both, 2015 should remain a year of opportunity to get deals done.