The peaks and valleys of real estate investment mean hotel developers are constantly making strategic decisions based on where they are in the investment cycle. So, where are we now? A recent Investment Sentiment Study conducted exclusively for Marcus & Millichap Real Estate Investment Services and Informa Engage showed a growing dichotomy in the hotel sector. “The performance metrics of hotels are fantastic. All the indicators continue to point to continued positive momentum, but investors also know that hotels can be very vulnerable to a recession or an economic downturn,” explained Skyler G. Cooper, national director of Marcus & Millichap’s Hospitality division.
Data through July puts average occupancy levels at 66.3%, while 12-month trailing RevPAR of $86.61 and ADR of $130.70 are growing at a rate of 1.7%. Generally, investors believe hotel values will remain relatively stable in the coming year. While 58% anticipate no change, 31% said values are more likely to rise and 10% think values will decline. The average expected increase of 1.6% is slighter higher than the first quarter survey where respondents predicted a 1.0% rise in values.
Concerns about recession risk or slower economic growth ahead is likely weighing on investment strategies. There is a clear trend that shows diminished investor appetite to buy hotels. Fourteen percent of investors think it is a good time to buy more, while 56% said it is better to hold and 30% believe it is better to sell. With so much for developers to consider, here are three investment strategies to leverage in a maturing cycle.
Maintain A Well-Defined Exit Strategy
While the market is experiencing stellar hotel performance, decisions must be counterbalanced by caution because of real concerns about oversupply and narrowing increases in occupancy levels and RevPAR.
To get the most value from a hotel asset, developers must have a clear-cut exit strategy that they stick to through all stages of the real estate cycle. While exit strategies are usually formulated before the purchase goes through, it will likely need to adapt based on the changing economic climate. And, decisions ought to be based on smart business strategy, not emotion.
In order to conceive and reset an exit strategy if necessary, developers should ask themselves – What’s the cap on financial resources I’m willing to invest in this property? How long do I want to hold this asset? When will I renovate and in what areas will I spend money? What valuation do I want to exit at? Accounting for timing related to a Property Improvement Plan (PIP) is also critical.
Low Interest Rates Deliver High Growth Opportunity
When numbers are “low,” there is a tremendous window of opportunity for hotel developers.
Take advantage of low interest rates to re-finance existing loans or gain additional capital in order to expand your business. As a result, developers enjoy substantial long-term financial savings that can be applied elsewhere – renovations, embarking on a PIP, or adding additional hotel assets to one’s portfolio – things they might’ve considered too costly with higher rates. Low-interest rates might also be the time to buy out partners looking to invest in other projects or stabilize debt.
Leverage the expertise of a seasoned mortgage broker specializing in hospitality such as Marcus & Millichap Capital Corporation, which has a proven track record in providing expert advice and customized consulting analysis. In the first half of 2019, Marcus & Millichap’s National Hospitality Group closed 129 hotel transactions valued at $630 million.
Benefitting From Brand Proliferation
Growth of brand proliferation has been exponential over the past several years, and there are understandable concerns about brand confusion among developers. With such abundant brand choice, though, there is also great opportunity in a maturing hotel development cycle.
Owners are encouraged to make the most of brand proliferation by flagging and re-flagging assets, ultimately repositioning and breathing new life into their properties, plus adding higher value to the building. If a particular flag is not succeeding as expected, owners can explore other flags in the brand portfolio that might be a better fit for the market. Developers entering new markets can elevate the value of older buildings by raising or converting flags. There are also opportunities to incorporate multiple brands into a single development if the potential for success is high.
A maturing cycle brings interesting, yet cautious times for developers. Maximize opportunity by taking advantage of low interest rates to re-imagine hotel assets, leveraging brand proliferation to increase property value, and conceiving a targeted exit strategy that has the legs to stand through all stages of the development cycle.