The total dollar amount of hotel deals in the United States is up 93 percent over last year during the first trimester of 2018, according to recent figures released from JLL. The increase equates to more than $11.9 billion in additional transaction volume this year.
Last week, Hotel Management reported that U.S. hotel performance grew more than many analysts expected. That performance is precisely why transaction activity is on a tear, according to JLL. Additionally, the firm said that cap rates sharpened due to the high profile of assets included in deals as well as continuing strong investor sentiment.
“Investor sentiment has markedly improved based on the widely held belief that demand will outstrip supply for the foreseeable future, resulting in stronger pricing power and solid profit improvement,” Arthur Adler, chairman for the JLL Hotels & Hospitality Group, said in a news release.
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Last year, transaction volume was down about 15 percent, according to JLL. This year, the industry is already seeing that pick up year over year as it’s inundated with available capital for acquisitions from real estate investment trusts, private investors, families and offshore investors.
On the other hand, JLL noted that a couple of factors are at play that are holding deals back. First, there is a lack of property coming to market. Second, many owners are refinancing instead of selling their assets.
South Florida Wins the Show
The deals pace is being driven by South Florida and West Coast markets—including Hawaii, resorts and portfolios of full-service hotels, according to JLL’s data.
Based on the South Florida hotels that have traded this year in addition to a strong pipeline, JLL forecasts the market’s hotel sales will reach $2 billion by the end of 2018. Bids on Miami and other South Florida hotels are meeting and exceeding seller expectations, according to JLL.
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If South Florida’s deals pace hits the $2-billion mark, it will far surpass the peak of $1.4 billion that was achieved in 2015. JLL’s analysts think that mark won’t be difficult to meet, however. The market continuously has new people moving in as well as company headquarters. South Florida provides an affordable—with a lighter tax load than many other southern markets—place to do business, according to JLL.
The Who’s Who
JLL gave a run-down of the current landscape, including who’s buying, selling and trading:
Who’s selling: Consolidation continues with hotel brand and parent companies. For example, Wyndham Hotels & Resorts recently acquired La Quinta for $1.95 billion.
Who’s buying: Canadian and Mainland China investors comprise the main sources of global investment, which consisted of 18 percent of transaction volume. Meanwhile, private equity comprised 48 percent of deals.
What’s trading: Transaction size is increasing. Portfolio transaction volume jumped more than 400 percent. Some notable deals in terms of size include: Hyatt Hotels Corporation’s $1-billion disposition of three luxury assets; Junson Capital’s $800-million portfolio purchase from MassMutual; and Brookfield Asset Management’s acquisition of more than 100 company-owned hotels from WoodSpring Suites.
Where: West Coast and resort markets remain active. In addition to South Florida’s boom, Hawaii is seeing the completion of more than $600 million in transactions.
Risks: While increasing supply and a challenging operating landscape remain top of mind for investors, increasing labor costs also are slowing operators’ ability to grow profit margins and investor returns.