Transaction Trends – Executive Summary
Selling Price Per Room Soars in 1H 2014. Competition Intense For High-End Assets.
Average Selling Price Per Room Year-Over-Year (YOY) catapulted 28% to $150,223 per room in 1H 2014, compared to $117,300 in 1H 13. Prices in 1H 14 are also up 17% over the year-end 2013 total of $128,352.
Buyer competition is keen, as REITs and Private Equity Groups with similar investment objectives compete for the larger, high-end hotels in CBD locations of major cities, most of which have now totally recovered. The competition is similar for hotels in the top resort destinations which have been a bit slower to recover. As a result these assets still have considerable earnings and appreciation potential ahead.
Internal transaction metrics for the sales mix in 1H show that, proportionately, hotel transfers larger than 200 rooms have more than doubled YOY. Transfers in the luxury, upper upscale and upscale chain scales are up 57% and hotels in CBDs and resort locations are up 39%. It’s a major shift towards institutional type quality assets.
Ascending since the cyclical low established in 2009, selling prices are at record highs in the luxury, upscale, upper midscale and midscale sectors and at CBD, airport and major suburban locations.
The three highest priced markets in 1H are New York at $619,154 per room, San Francisco $383,924 and Miami at $363,294. Although a useful guideline, investors are cautioned that sample sizes are small and valuations are always hotel and location specific.
Seller and Buyer Activity
For hotels with a selling price reported into the public domain, investor activity in 1H totaled 7.5 billion. After viewing upcoming projects scheduled to close in 2H 14, investment activity for the year should be close to the 17.2B reported for 2013.
A complete economic recovery, a forecast for continued steady economic growth, receptive capital markets and a docile pipeline make it an interesting time for investors. Based on the makeup of their portfolios, it could be an ideal time to be both a seller of hotels, or conversely, an acquirer of additional assets. It could also be opportune to be a holder of existing assets seeking additional operating improvement and asset appreciation too.
Private Equity Funds and Hotel Companies who acquired undervalued assets near the bottom of the cycle, assumed the risks associated with the economic recovery and provided additional investment for the repositioning of their assets are now close to the end of their holding periods. They are active sellers accounting for 60% of all selling volume in 1H 14. It’s an excellent time to dispose of these assets. Cap rates are low, interest rates are attractive and competition for prized assets is combining to produce selling prices at peak levels.
Conversely, publicly traded REITs have slowed their selling activity having pared their portfolios earlier. Over the last two years they have been mostly adding recovered properties with stabilized earnings to their portfolios. REITs accounted for 36% of all buyer activity in 1H. A few Equity Funds with investment objectives similar to REITs are looking for assets with further development potential, which may often include a residential component. Like REITs, they too plan for a longer holding period.
In 2013 there was 17.2B of hotel investment activity with reported selling prices. Total investment activity increased to 21.8B when Partial Interest Sales and estimates for hotels without reported selling prices was considered and the valuation of merger activity was added in.
During 1H 2014, these ancillary property transfers exceeded last year’s pace. As a result, LE anticipates that total industry wide investment activity could finish as high as 25B in 2014.