A limited number of potential deals, interest-rate increases, performance metrics and several other factors are all playing into the valuations seen in the hotel industry.
ATLANTA—Even though many think the hotel industry is late in its cycle—or perhaps the current cycle doesn’t follow the typical patterns—there are buyers eager to do deals.
Speaking during the “Hotel values in a changing market” panel at the recent Hunter Hotel Conference, a group of owners and experts shared their insights on what they’re seeing in the world of hotel valuations.
1. Portfolios are off the market
When moderator Danny Givertz, SVP of Hunter Hotel Advisors, noted there seems to be “limited supply of assets on the market available today,” Sam Reynolds, EVP and director of acquisitions and dispositions for Apple Hospitality REIT, said things are looking a little better than recent history.
“Compared to this time last year, there’s probably a little more,” Reynolds said. “There are plenty of single or two-off assets. But we’re seeing fewer portfolios. We had seen more of that coming out last year.”
Ryan Phelps, VP of acquisitions for Newport Beach, California-based T2 Hospitality, said he’s seen a “very limited” number of assets available in his home state and said interested buyers “have to be scrappy to find them.”
“The bid-ask (spread) is still a little wide,” he said. “And it’s getting potentially wider.”
2. Cap rates seem stable despite competing forces
Hank Staley, managing director for CBRE Hotels, said hotel cap rates seems to have found some equilibrium even as the “opposite pressures” of net operating income and interest rates seek to push them up and down.
“If you look over the last seven or eight years, there’s been very little variation in cap rates,” he said. “And going forward through 2020, we’re projecting an increase of about 35 basis points over all hotel asset types. That corresponds with an interest rate increase of 100 basis points. So it’s going up but just barely.”
Janet Snyder, managing director and partner for HVS, said she’s seeing the same thing with full-service hotels, which are experiencing a “modest” increase in cap rates, while select-service properties are seeing even less.
“As the (Federal Reserve) starts increasing interest rates, and we expect three more rate increases this year, RevPAR continues to grow and NOI increases,” she said. “Those should mitigate each other.”
Phelps said he’s seeing properties regularly trading at cap rates of 6% to 6.5%, while Staley said he’s seeing properties in markets like Jacksonville (where he is based) trade at 8% to 8.25%.
3. Construction costs affect supply
Staley said the significant increase in construction costs has dramatically curtailed supply growth and new construction, which has even affected relatively straightforward brands like Hampton Inns. He pointed to one such hotel that ended up costing roughly $180,000 per room in north Florida.
“I’ve seen more deals collapse in the last couple of years than I’ve seen in my entire career,” he said. “Once everyone understands the real numbers, they’re like, ‘Maybe we don’t want to do that.’”
He said deals often fall apart even after developers control the land.
Phelps said his company has been focusing a bit on development and added it’s “incredible how much (construction costs have) gone up.” He said the dramatic increase in construction costs should factor in to how investors look at markets and the supply dynamics in a market.
“If there are 3,000 rooms in the pipeline for a market, it’s pretty safe to say half of those don’t get done,” he said.
Staley did note, though, that the increase in costs doesn’t necessarily translate to people opting to buying existing assets instead of building new, since there are other factors to consider like the costs to update those properties after purchase.
“In the last five years with all the boutique stuff going on, there have been real changes in what hotels look like,” he said. “So you can buy a five- or six-year-old asset that is relatively new but nonetheless requires substantial changes.”
4. Alternative accommodations factor in to calculations
When panelists were asked if the presence of Airbnb in a market affects hotel valuations there, they noted it can be somewhat difficult to parse.
“I’m not sure it’s directly correlated to cap rates,” Staley said. “But it’s certainly a function of the supply.”
The problem, Staley noted, is supply from Airbnb can wildly fluctuate even on a day-to-day basis. He also said the impact of that supply is hard to quantify given it’s unclear how much demand Airbnb is taking from hotels.
“It’s clearly a factor,” he said. “If you had asked me five years ago, I’d probably have said it’s irrelevant.”
5. Reality is setting in
While questions of where the industry sits in the cycle didn’t yield firm answers, Phelps said there’s a decidedly different tone in the hotel industry than just a few years ago.
“There’s not the same excitement about the future as five years ago, maybe because we’re calloused investors,” he said.
Phelps said one thing that seems to be causing concerns is moderate revenue-per-available-room growth coupled with increasing costs—particularly tied to labor.
Reynolds said his company is projecting 2018 RevPAR growth to range between flat and 2%, and he’s seeing pressures on profit margins.
“With the tax changes, people are feeling a little more positive, and that’s juiced everybody’s numbers for this year,” he said. “But there are certainly wage expenses (growing) across all our markets. That’s something we’re watching more.”