Members of the Lodging Industry Investment Council used a happy hour panel discussion during NAHIC to project trends in 2014, name the most lucrative asset classes in which to invest and remember 2013’s top deals.
CHICAGO—A half dozen members of the Lodging Industry Investment Council took time out from last month’s North American Hotel Investment Conference to enjoy a warm and fuzzy happy hour panel discussion on a cold, rainy night in the Windy City.
Led by moderator Mike Cahill, co-chairman of LIIC and CEO of Hospitality Real Estate Counselors, the panelists wove their way through the hour-long discussion with many stops along the way.
The outlook for hotels wasn’t surprising as health care reform was named as the top issue by four panelists: Craig Mueller, VP of development for InterContinental Hotels Group; Steven Angel, principal with Fulcrum Hospitality; Bill Sipple, executive managing director for HVS Capital Corporation; and David Loeb, managing director of Robert W. Baird & Company.
Mueller said unions in major cities also are of concern to hoteliers, while Loeb named property taxes. Sipple pointed to rising energy costs as a potential headache.
Steve Johnson, executive VP of Driftwood Hospitality Management, said he is most worried about new supply. “I know we’re hearing it’s constrained, but we’re getting a letter every week from brands saying they’ve got a new hotel in the market.”
The panelists set 2014 revenue-per-available-room growth at approximately 5%—ranging from Angel’s projection of 4.5% to Sipple’s prediction of 6%.
In addition, the panelists agreed the cost of capital should slightly increase during the next year.
“Debt yields a year from now will be slightly higher, but not a lot,” Sipple said.
Angel said he expects pricing to increase between 50 basis points and 100 basis points during the next 12 months.
“There’s so much money coming into the hotel market; it’s going to compress yields,” he said.
President Obama’s policies have had minimal effects on hotel underwriting, the speakers also said.
“The Bernanke administration has made a big difference, but the Obama policy in and of itself has not changed the way investors underwrite,” Loeb said.
Sipple said the policies have forced lenders to underwrite differently because there’s more risk involved in owning and operating a business under Obama’s policies than under previous policies.
“I don’t see a big impact; it’s all cycles,” Mueller said.
Best sectors to target
The speakers’ responses varied widely when asked about the best sector in which to buy hotel assets during 2014.
“Resort has been out of favor; there’s seemingly additional opportunity,” Angel said. “Look at pricing, particularly relative to replacement value, and hopefully group pricing is coming back.”
“If we could find a large number of select-service (hotels), we would buy,” Johnson said. “We want to find something that needs tender, loving care and we could upgrade it.”
Mueller said luxury and upper-upscale hotels will be hot commodities.
“I’m a big fan where there’s not a lot of supply short term,” Mueller said. “Pick places that don’t have big convention boxes, and in the high-end market, look for an existing asset.”
Sipple said he would pay above replacement costs for select-service assets if his strategy were to hold the asset through the next cycle.
“Select service in high barrier to entry markets,” Sipple said. “It’s idiot-proof. It doesn’t take a whole lot to run one properly.”
Investing their nest eggs
The panelists weren’t eager to hypothetically spend their retirement accounts, but when pressed by Cahill to share what specific market they would invest their nest eggs, New York was the clear winner—until Cahill said no markets could be repeated.
“I’m truly scared about supply picture in New York. … You’re going to have the ‘haves’ and ‘have nots’ in specific submarkets,” said Angel, who was the first to answer the question. “But over the course of the next 10 to 20 years, it’s got to be New York.”
Johnson chose Columbus, Ohio.
“I like college towns,” he said. “Columbus is a capital city and has a new medical system.”
Mueller and Loeb looked west for their choices.
“Honolulu, so I can also go there and live,” Mueller said. “The lack of supply, the challenges of getting (new construction) done … You just can’t build in Hawaii, so I think values there long term are going to be wonderful.”
“I would say San Francisco,” Loeb said. “Most of the CEOs of the (real estate investment trusts) would say San Francisco. It’s very hard to build there; the highest and best use today is office and residential. Demand trends are fantastic; there’s no supply growth.”
Sipple decided on another gateway market.
“If I can’t have New York, I’d like to be in Miami,” Sipple said. “The university stuff gives you some continuity to the brand, and Miami’s got an appeal to Europe and Latin America travelers.”
Deal of the year
This year has been a fairly active one for hotel transactions, and each executive named the most significant deals:
- Sipple: “It could possibly be Blackstone’s IPO of Hilton.”
- Loeb: “Blackstone buying Apple 6 (REIT fund), which was very significant.”
- Mueller: “For a single asset, Hyatt buying the Peabody Orlando.”
- Johnson: “The Hilton IPO, and the Extended Stay (America) deal was good.”
- Angel: “The Renaissance St. Louis. It’s such an interesting case study on the state of the industry: a 900-room hotel with a major flag next door to a convention center in a decent market that can sell for $28,000 a key or thereabouts.”