Hotel transactions are falling compared to particularly strong volume in 2014 and 2015 as buyers haggle more to push down pricing.
BOSTON—The end of 2015 and the beginning of 2016 saw a shift in hotel transactions driven largely by shifting expectations for buyers, sources said.
Speaking during the Americas Lodging Investment Summit Summer Update in Boston’s “Acquisitions outlook” panel, brokers and investors said concerns about slowing growth have buyers on a quest to push down purchase prices.
Robert Webster, managing director with Jones Lang LaSalle’s Hotels & Hospitality Group, said there is “clearly a drop off in transactions volume” within the industry, but that is in large part because the last few years have been exceptionally strong.
“One takeaway is 2014 was definitely a strong year, the strongest year since 1996,” he said.
But James O’Shaughnessy, managing director for Cornerstone Real Estate Advisers, said the slowdown is also a symptom of buyers sensing “blood in the water.”
“So they’re exploiting all the things one exploits as a buyer,” he said, noting buyers are using things like cost expectations with property improvement plans and scrutinizing building conditions in order to negotiate prices down.
Jonathan Martin, VP of AEW Capital Management, said his company has been a net seller for the past nine months, and the market in general is struggling to overcome the fact that public real estate investment trusts are sitting on the sidelines.
“They’re sitting back and being patient,” Martin said. “It’s all about patience.”
Martin estimated transaction volume for the industry is roughly 10% off from what was seen at the peak but admitted the calculations for that comparison are “a little bit complicated.”
Mike Cahill, CEO and founder of Hospitality Real Estate Counselors, said a slowdown isn’t drastic from his perspective.
“We typically average about 70 exclusive listings on the market,” he said. “And right now we have 65 with a good pipeline.”
He said the slowing in transaction isn’t as prominent for the most desirable assets, which are still fetching pricing close to that seen in 2015, but lower-end product is struggling to keep up.
“There is more fallout for commodity-type hotels,” Cahill said. “That will contribute to some fall for volume.”
Cahill said some private-equity buyers are still on the lookout to buy, and he added that’s the most rational thing to do at the moment for those who think the industry is coming in for a soft landing to the current cycle.
But Akshay Goyal, VP at Starwood Capital Group, said there are other things affecting companies’ ability to execute deals.
“Year-to-date we’re not buying as aggressively,” he said. “A lot of that is driven by financing and uncertainty about availability of financing.”
Market by market
Panelists stressed that, despite overall industry trends, transactions still boil down to the strength of individual markets and properties.
“It’s a market-to-market story, and it’s about the type of asset you’re selling,” Goyal said. “For trophy luxury assets, (changes to pricing and volume) are not significant at all. It’s just changing the buyer.”
Each of the panelists called out markets they thought held particular promise, which included Denver; Portland, Oregon; Tampa, Florida; Charlotte, North Carolina; and Savannah, Georgia.
Cahill said he’s particularly bullish on investment opportunities in Palo Alto, California.
“There are motels (in Palo Alto) that are getting walk-ins Monday through Thursday at $500 a night,” he said. “Someone should convince Stanford to build on their campus.”
Strength going forward
Webster said he anticipates a strong close to 2016.
“I think this year is going to be really backloaded,” he said.
Cahill reiterated that now is the time to buy if you believe the industry is hitting the end of the cycle.
“A five-to-seven-year holder should buy this year or next year,” he said. “That’s the opportunity. … If you believe (the cycle’s end is here) and you believe uncertainty creates opportunities, then now is the time to buy hotels.”
Martin said he thinks the end is nearing, but that doesn’t mean some doomsday is approaching.
“We’re not in a recession,” he said. “But even positive cycles die of old age.”