Pictured: In the largest transaction to close during the first quarter of 2014, Host Hotels & Resorts sold 89 percent of its interest in the Philadelphia Marriott Downtown hotel to Oaktree Capital Management and Clearview Hotel Capital for $269.2 million.
As the halfway point of the year approaches, brokers checked in on the health of transaction activity, and things seem to be going well.
The first quarter results have been strong overall, according to Ernest Lee, director, capital markets, hospitality at Cushman & Wakefield. “There have been increases in transaction volume in the major [metropolitan areas] and the tertiary markets, but less so in the secondary markets. The overall increase is driven by buyers with lots of dry powder and a very strong financing market.”
There is plentiful capital. “Both equity and debt capital are looking to invest in the market—including domestic and international investors,” said Pete Dannemiller, managing director, Hodges Ward Elliott. “There has been more international capital investing across all real-estate segments and a lot of it is finding its way into hospitality. There is a real flight of capital to safe harbors, and the United States is perceived as the safest harbor right now.”
In the past 60 days, according to Dannemiller, the level of pitches for potential new business has increased. “We think more product will be coming to market as early as the second quarter and into the third and fourth quarters.”
First-quarter figures from Real Capital Analytics, the most recent data available, indicate a sizeable increase in deal volume, both in terms of dollars and properties transacted, when compared to the first quarter of 2013.
* A total of $7.1 billion in volume for a year-over-year increase of 23 percent.
* A total of 319 properties transacted for a year-over-year increase of 15 percent.
* Full-service hotels accounted for $5.3 billion, while limited-service hotels represented $1.9 billion in deals.
Both real estate experts agree that international capital is something to watch in the current market. “There is a lot of cross-border capital flow, with the coasts remaining the most attractive to Asian and Middle Eastern sources,” Lee said. “For the first time, we are also seeing appetite for secondary markets from these international groups. It will be interesting to track over the next three quarters to see whether that is an anomaly or a trend.”
The increased investment interest has an impact on real estate markets. “For prime assets in gateway markets, that capital can be very aggressive, because they have other reasons to invest than just an absolute return metric,” Dannemiller said. “They may be willing to pay lower cap rates in return for the stability, transparency and liquidity afforded by investments in these markets.”
International investor presence will continue to increase, he added. “The world’s not becoming safer, so as long as that reality of instability exists, there will be capital flowing toward the U.S.”
Lee said in the next few months there will be a significant shift in the type of buyers. “We are seeing and hearing it from our clients; a lot of institutional investors are increasing real estate allocations,” he said. “Larger fund managers will have access to different buckets of capital. In addition to the opportunistic funds, the big guys will also have increased allocations to core plus and value-add money. It’s likely we will see them be more competitive in the top markets again—like New York and San Francisco.”
Public REITs were not as active this past quarter and we may see a shift in acquisition strategy, Lee said. “It will be interesting to see if there’s a shift in geographic and asset focus for some of the REITs,” he said.
Lee added that he believes the focus will be on the West Coast and resorts. “Many of these investors already have a strong portfolio presence on the East Coast or urban in-fill locations and are likely looking to diversify.”
Return of the REITs?
“We didn’t see too much REIT activity in the first quarter,” Lee said.
Dannemiller expressed similar sentiment. He was surprised that REITs have not been more active. “Given the strong currency they enjoy as a group, trading at very high EBITDA multiples, you would think they would be more acquisitive,” he said. “They may yet.”
Lee said it is a great time to be a seller: “Average cap rates, according to RCA, have been in the high 7s over the past 24 months, but that is still well below periods in 2005 or 2006 where cap rates were in the mid-to-high 8s. Much of that has to do with historically low benchmark rates.”