NASHVILLE, Tennessee—Though hotel transaction volume has slowed, investors are becoming more comfortable in the deals they are making, according to research presented by STR Analytics at last week’s Hotel Data Conference.
Through August, U.S. transactions volume totaled approximately $8 billion and is on track to close out the year in a range from $12 billion to $14 billion, said Steve Hennis, director at STR Analytics, sister company of HotelNewsNow.com. By comparison, deal volume a year ago totaled $20 billion.
“People are holding assets instead of selling,” Hennis said.
“What you’re seeing is more of an average or maybe mediocre year as far as hotel transactions are concerned,” he added.
That said, data shows investors are reassured by the prospective returns awaiting them following a deal. According to STR Analytics’ Hotel Investors Gauge survey (available to paid subscribers of HotelNewsNow.com’s sister publication the Hotel Investment Barometer), the leveraged internal rate of return expected by investors was stable at 18.5% during the second quarter.
The median hold period investors cited was 5.7 years, while the capitalization rate on trailing 12-month net operating income was 8.5%. “People are becoming more confident investing in hotels,” Hennis said. “They don’t see as much of a risk as in 2009.”
Further, the decline in distressed sales is another signal of the sector’s health to investors, he said. Year-to-date distressed sales comprised only 12% of deals compared to 31% in 2011.
“That’s a very good sign as far as the stability of the industry right now,” he said.
During his presentation, Hennis dived deeper into the numbers behind the deals being made today. For instance, price per room is on the upswing despite the deals downturn. Average price per room inched up by 1.6% to $192,000 year-to-date August from $189,000 during 2011.
Real-estate investment trusts “have helped push that number up,” Hennis said.
But still, REIT deals have fallen off considerably compared to a year ago, he said. In 2011, REITs accounted for 35% of U.S. transactions; this year, REITs have comprised just 18% of total deals.
“This year, it’s really settled down a bit,” he said. Hennis added that the 18% figure is the lowest percentage of the total he would expect to see from REITs.
In seeking to get the most out of their return, Hennis noted that buyers are investing more capital per room in hotels. Additional capital per room in 2011 was $14,400, up 53.2% from $9,400 in 2010.
“We expect to see a lot more investment driven by (property improvement plans),” Hennis said. “We should get to $20,000 to $25,000 per room (in 2011).”
Hennis also provided a snapshot of where the deals are happening and what asset classes are trading.
As might be expected, New York is king of the hotel deals landscape, with 10 transactions representing volume of $1.6 billion and an average price per room of $628,000 through August.
“Everyone prefers to be in the top 25 markets and an urban location,” Hennis said.
As for which chain scales are trading, luxury, as might be expected, leads in price per room at $471,000. But the upscale segment is seeing the most activity, Hennis said.