When is the best time to buy, sell or retain a hotel? The decision isn’t simple, and it requires extensive analysis, a forward-thinking mindset, and a degree of risk.
We’re currently in one of the longest upcycles in recent years, and strong economic indicators are driving hospitality transactions – low interest rates, a strengthening GDP, available capital, and measured growth compared to other cycles. Plus, the supply-demand gap for hotel rooms across the U.S. is still favorable, although narrowing, and increases in occupancy levels and revenue per available room (RevPAR) are expected for 2019.
Changes in the cycle are inevitable, though. When will the market experience a downturn? How will a property thrive amid an over-supply of rooms or the introduction of new hotel brands? What about the continued impact of Airbnb and other potential industry disruptors? Faced with the reality of these market fluctuations, hotel owners must consider what’s the right thing for them to do at this late point in the investment cycle – do they buy, sell or hold?
Embarking On The “Big Buy”
Location, location, location is paramount for hotel success. Before buying this late in the investment cycle, understand a destination’s growth potential, choose a location that encourages multiple revenue streams to drive profitability, and research the local economy of the market you’re entering. Brand choice is critical, too. Select a branded property that enhances a market’s current product portfolio, so you are best poised to attract a healthy share of customers and aren’t competing with others in the brand family.
Additionally, explore street corner assessments to determine real estate value, study deal-specific metrics, and be aware of realistic financing options in order to make smart purchasing decisions.
Consider a strategic 1031 exchange, where you sell one qualifying property and acquire another qualifying property in a short amount of time. The transaction is treated as an exchange, not a simple sale, and the taxpayer enjoys significant tax benefits. For a 1031 exchange, align with an expert like Marcus & Millichap who understands the tight timelines and strict rules of this transaction; the California-based company closes over 60% of these types of purchases annually.
Selling As The Solution
At this point in the investment cycle, owners are increasingly examining their hotel’s property improvement plan (PIP) to see if it makes sense to allocate further monetary resources or sell and move on to other projects.
Owners may opt to sell if supply in a market is starting to overflow with similar properties, or when adhering to a brand’s PIP digs so deep into an owner’s pockets. Check credible online review sites to see what customers are saying about a hotel because this can help determine if the existing flag is worth the PIP. Owners that do invest in a PIP before selling, though, typically make the property more attractive to buyers.
Other good times to sell are at the end of a franchise agreement or when a 1031 exchange is a viable option. Whatever the reason to sell, owners should have realistic pricing expectations, so they don’t bypass opportunities from vetted buyers.
Sticking With It – Retaining The Hotel
When holding on to a hotel asset, it is crucial for owners to have a long-term strategic plan in place that aims to cultivate profitability, but that can also adapt to the hospitality industry’s sometimes-volatile development cycle.
Retaining a hotel puts today’s owners in a new level of watch-dog mode when it comes to expenditures, so be cautious of the impact of rising current costs and new expenses. When owners start spending more, this outlay needs to be carefully measured against property performance and projections for growth based on supply and demand metrics.
PIP expectations are also a deciding factor. Investing in brand-required compliance may result in increased revenue, bolstered customer loyalty, and a healthier asset. Based on market conditions and existing product in a location, owners in it for the long-term may also explore other branding options that better fit a changing destination.
Whether buying, selling or retaining a hotel at any point in the investment cycle, owners are encouraged to work with an expert like Marcus & Millichap that has a proven track record in providing expert advice and customized consulting analysis. In 2017, Marcus & Millichap’s National Hospitality Group closed 237 hotel transactions valued at $1.3 billion.
Situational and economic changes are unavoidable, so hotel owners must consider how they’ll handle this inevitability – and whether to buy, sell or hold a hotel. Regardless of the move, the goal is the same – to ensure that hotel products thrive, deliver flawless guest experiences, and drive profitability.