BOULDER, Colorado—Most people are elated that 2009 is over, ready to write last year off and bid it good riddance. We witnessed the collapse of financial institutions, the closing of major automotive manufacturers, a record number of housing foreclosures and a ballooning unemployment rate.
The lodging industry in particular had the most stagnant transaction environment since the early 1990s, and the steepest decline in revenue per available room since the Great Depression. With hopes that the worst is behind us, 2010 is welcomed as a potential turning point in the U.S. economy, as if we passed through some magical portal on January 1.
Looking back at 2009, fewer than 50 properties in the upscale and luxury sector traded, with close to half of those deals involving distressed assets. The average price per room plummeted to a mere US$82,000 among upscale and luxury properties. In 2008, the average price per key was US$173,000, and at the height of the real estate cycle in 2006, the average price per room was more than US$240,000 for upscale and luxury hotels.
Several high-profile assets changed hands in 2009, but many were driven by bankruptcy or foreclosure, including the Greenbrier in (Sulphur Springs, West Virginia), the St. Regis Monarch Beach (Dana Point, California), the Hotel Jerome (Aspen, Colorado), the Wigwam (Litchfield Park, Arizona), and the Ilikai Honolulu, Hawaii). Nevertheless, a few “market” transactions occurred during the year, most notably the high-priced sales of a few select-service hotels in Manhattan. At US$150 million, the Best Western President garnered the highest overall price as well as the highest price per room at close to US$450,000. The table below shows several of the non-distressed sales that occurred in 2009.
The capital markets awakened near the end of 2009. Pebblebrook Hotel Trust and Hyatt Hotels successfully completed initial public offerings, raising more than US$1.3 billion combined. Interstate Hotels & Resorts is being acquired for US$307 million, and Blackstone is eyeing Highland Hospitality after acquiring its debt for US$320 million.
As 2010 begins, we might finally be viewing some light at the end of the tunnel. The final week of 2009 experienced the first year-over-year improvement in RevPAR since 2008. While this is just a flicker, it may be enough to indicate that the bottom is clearly within sight. With that, investors would be wise to uncork their capital ammunition, acquire assets and reap the rewards as we ascend from the depths in 2011 and beyond. Such companies have been salivating for the point in time to arrive when the lodging market hits rock bottom. Numerous funds (see “Hotel acquisition funds list”) have been patiently waiting for the right opportunity at the right price. Perhaps that time is finally at hand.
Certainly, struggles will persist on several fronts in the coming year, with revenues well below “normal” levels and debt remaining scarce. Delinquent loans will continue to mount during the next few months and be a catalyst for many assets changing hands. Some will simply be returned to their lenders.
However, the glut of assets piling up on the books of financial institutions will eventually be disposed of in the marketplace. By now, it has become dreadfully apparent to lenders that the market values of delinquent hotels are well below the loan balances on their books. Compound that realization with the fact that those values will not return for at least three to five years, if not longer. Writing down those assets further is not in the best interest of banks looking to pass the government’s stress test, and most banks would prefer not to own portfolios of underperforming hotels. Consequently, lenders will have no other choice than to divest themselves of the properties they assumed ownership of. When they do, they will unleash a wave of real estate transactions that will fuel the next investment cycle that we are all eagerly anticipating.
Stephen Hennis, CHA, ISHC, has over sixteen years of experience in hospitality investment analysis. He is Director of STR Analytics which specializes in data mining, comparative analysis, performance and investment trends, and consumer research in the lodging industry.