There has been an uptick in the amount of investors buying U.S. hotels without having any prior hotel experience. Hotel News Now reached out to hotel brokers to find out more about them.
REPORT FROM THE U.S.—Despite stagnating revenue-per-available-room growth and an undesirable mix of supply and demand, new players have been looking to invest money in the U.S. hotel industry for the first time, and the hotel brokers who have helped them see plenty of upside.
Who are the buyers?
Many first-time hotel buyers are skilled in commercial real estate and want the returns being realized in hotels, said Drew Noecker, managing director and co-director of the brokerage and advisory division at HVS. Many of those with commercial real estate experience see the value of including a hotel in their mixed-use project, he said.
One group he has worked with bought out a corporate campus and specifically allocated a portion of an office building next to a conference facility as a hotel, he said. They’re going in as the majority partner and have a third-party management company helping them.
Most of the new buyers he’s worked with are U.S.-based, Noecker said. The international investors are generally more conservative than domestic investors and are just trying to achieve a yield, which makes sense since they don’t have boots on the ground here, he said.
Geraldine Guichardo, VP of Americas Hotels Research at JLL, said she has observed two main types of first-time buyers. The first is a hedge fund looking to diversify its investment, which is an indicator of the long economic cycle, she said. Achieving the types of returns these kind of shops are used to getting is becoming harder, so she said they’re getting creative and diversifying into what is seen as an alternative real estate class.
Another type of first-time buyers is high-net-worth individuals, particularly overseas investors looking to get some excess cash off their books, she said.
“The U.S. is seen as a safe place for investment, given geopolitical tensions,” she said.
Often, foreign investors will gravitate toward trophy assets for a sense of pride, and that helps them get the type of yield they are looking for, she said. Many are investing through private equity groups or family offices.
Tom Huegel, SVP at Hospitality Real Estate Counselors, said many of the first-time buyers he has encountered are part of the Indian community in the U.S. who run convenience stores and other-service oriented businesses. They see hotels are strong value propositions and call upon their experience in other areas to invest in and operate a hotel. One of his current clients owned a large chain of tax-service business in the mid-Atlantic and Southeast, he said. The client sold his business and started buying hotels.
Those coming from other forms are commercial real estate are dipping their toes in the water, he said.
Another client of his is a CRE group based in Atlanta that realized hotels are good business after spending time in the retail and industrial sectors. This group has a longer-term perspective and has already teamed up with a third-party manager with plans to build a midsized portfolio, he said.
He said it makes sense for buyers from other industries to look at hotels.
“There’s a lot of opportunity for guys that have that kind of experience in other businesses to transfer over,” he said.
Types of properties targeted
The types of properties these new buyers are gravitating to are on a spectrum, Guichardo said.
“We’re seeing definitely an increasing interest in midmarket and strong branded select-service products,” she said. “There has been an influx in supply in that segment, so we are seeing new supply able to outperform.”
Select-service hotels provide higher yields and have higher GOP margins compared to full-service, she said. “That makes them more attractive to first-time buyers looking for stronger yield and higher income potential,” she said.
New buyers who pursue full-service hotels are after trophy assets, she said.
She noted most new buyers are going after branded properties with a flag, but some are taking advantage of the soft-brand collections for more unique properties.
Noecker said mixed-use-development hotels help buoy rents and provide a healthy amenity base. Owners see the hotels as something the tenants in their office spaces can use.
Most of his clients have been buying and converting properties, he said. Many are going after developments being repositioned entirely.
“They’re taking it and repositioning it to a new kind of asset, taking something from another part to make it a hotel,” he said.
The goal of each investment depends on the buyer, Guichardo said. A private fund might have specific allocations to meet for real estate. Hedge funds, meanwhile, are looking to diversify and achieve higher yields than what is available in other asset classes.
Foreign investors might like hotels because they’re a relatable, high-yielding asset class they can hold on to for a long period, she said.
Noecker said his commercial real estate clients tend to be intermediate-term holders of hotels. They want to hold onto a hotel while it accelerates the value of their other real estate in a mixed-use development.
“Oftentimes the hotel is a small piece of (the project) and the office part is larger,” he said. “The hotel is the thing that is an amenity or demand driver for the office building.”
Within the Indian community in the U.S., buyers are getting into hotels to leverage their existing business experience, Huegel said. They’re trying to get off the ground by owning and running a handful of hotels, and returns are at the top of their priority list.
Those who are coming from operating convenience stores and liquor stores see hotels as a way to get out of less rewarding daily operating businesses, he said. They might start off with a lower-level hotel where they are owner/operators and, if successful, take those returns and reinvest in their business and possibly team with a management company, he said.
Those who are coming from other business or real estate backgrounds might initially start with an experienced third-party management team and spend three to four years learning the ropes with them, he said. After that, they might want to pursue taking over management themselves.