The headlines are ripe with talk of banner deals, but a shortage of institutional-grade investment type of hotels on the market is putting a squeeze on capital looking for places to deploy.
Right now, owners want to ride the tide all the way to the top, according to Steve Kirby, principal of Mumford Co.
“There’s a tremendous amount of demand for the institutional-grade product and there’s not a lot of that type on the market right now,” said Lee Hunter, COO of Hunter Hotel Advisors. “We’re telling our clients right now, if they own, they should consider catering to that demand.”
Clients are saying, “I know I should sell, I know now is the time, but I can’t bring myself to do it. I know how much money I’m making and I don’t want to lose making that money,” Hunter added.
Room revenue as of June year to date was $64 billion, an increase of 8.4 percent compared to the same period for the prior year, according to Smith Travel Research. It’s very hard to know when the peak is, Kirby said. “By all accounts, it’s now. But the analysts won’t tell you it’s the peak, they keep saying RevPAR will increase, occupancy will not grow as much next year, but rates still might creep up.”
Part of the urgency in getting a property on the market when there is high demand is the uncertainty, Kirby added.
“While there is a lot of money flowing into the hotel segment, there are a lot of crises going on in the world that might impact availability of those funds,” he said. From ISIS, to Ukraine and the gas situation in Europe, money is fleeting, Kirby said. “It moves from segment to segment and right now it’s heavy in real estate, but that won’t last forever,” he said.
Hunter pointed to the inevitable increase in supply as a reason to sell now, despite the continued improvement in operating fundamentals. Particularly as it relates to street-corner economics.
“Supply has been relatively and historically low and that’s starting to change,” he said. “The value of existing assets is affected not when a property opens in a market, but it’s affected when it’s announced that it’s coming. It’s too late when new supply picks up. For an owner in that market, their value just went down even though the property is not opening for 18 months.”
Recent projections indicate that supply growth in 2014 will be 1.0 percent and demand growth will be 3.6 percent for the entire U.S. hotel industry compared to prior year, according to STR. Projections for 2015 show 1.3-percent growth in supply and 2.1-percent growth in demand.
Kirby said there also is the supply growth factor that lower-end and aged properties are being demolished or removed from inventory, when the highest and best use is no longer as lodging accommodations.
Related, Hunter said that there is institutional-grade hotel product that will soon age out.
“In two years, the same hotel will not be considered institutional product,” he said. “Age is a big consideration in those kinds of deals and it becomes less attractive to institutional equity. In the six- to nine-year timeframe, you’re going to have a [product-improvement plan] so it’s less attractive.”
Kirby advised an owner who might be waffling on completing a PIP to take the plunge. “You wouldn’t want to put the franchise in any jeopardy if you fail your QA inspection,” he said. “It makes it that much more difficult to deal with the franchisor.
“You want to get the PIP done for the new buyer up front,” he elaborated. “It takes away a lot of the stress and the due diligence, so it’s not a great unknown. It’s just better to do away with any unknowns.”