Hotel investment climate remains strong
30 APRIL 2014 6:12 AM
Several factors have aligned to create a favorable market for hotel transactions and new development. But how long it will last?
Editor’s note: This is the second in a two-part series from the Real Estate Investment Management Advisory Council panel at The School of Hospitality Business at Michigan State University. The first story looked at strategies to maintain momentum in a strong hotel market.
EAST LANSING, Michigan—It’s a good time to buy, sell and develop hotels, and the trend should continue for the foreseeable future, panelists said during a roundtable earlier this month at Michigan State University.
“We published a piece a month ago that said if you assume a 75% (loan-to-value ratio) the amount of hotel-specific equity capital that has been raised or close to being raised equates to about $75 billion in buying power,” said Ryan Meliker, managing director of REIT research and lodging research at MLV & Company. “That’s a lot of capital.”
Meliker was among approximately 35 members of the Real Estate Investment Management Advisory Council of The School of Hospitality Business at Michigan State University who discussed a broad range of hotel industry investment topics during a 4 April meeting in East Lansing, Michigan. The panelists included hotel owners, operators, brand executives, analysts, brokers and consultants.
“As long as you can get the leverage there’s going to be capital chasing deals regardless of how many deals are coming through,” Meliker said, adding that it’s also important for the equity markets to continue to perform as they have been.
“From a (real estate investment trust) perspective, most of them are trading at or above the net asset value of their portfolios, which means it’s feasible for them to raise equity in the stock market to buy assets at market value,” he said.
Rising property values mean a lot of hotel assets—particularly select-service properties with strong brands—are coming to market.
“We’re in a situation when property values are growing exponentially and prices per room are getting back to peak levels or in some cases exceeding peak levels, said Nate Sahn, senior VP of investment properties for CBRE Hotels. “A lot of owners are realizing this, and that’s why we see a lot of properties or portfolios coming to market and trading.”
Less attractive to buyers are older, full-service hotels in tertiary markets, Sahn said.
“A lot of equity feels they’re more risky investments, and they don’t know what the exit strategies will be,” he said. “But as long as they can buy them at the right price, some of these transactions will get done. It’s just a thinner market.”
While the investment environment is strong today, it might not last forever, the panelists cautioned.
“No one can point to anything out there that’s going to negatively affect where the economy goes, but it feels like a lot of things could out of nowhere put some bumps in the road very quickly and globally,” said Matthew Sparks, senior VP, luxury and corporate development for Hilton Worldwide Holdings.
Meliker said the hotel industry has recorded improving revenues per available room for several years, which could have an effect on investor sentiment toward the industry.
“We’re already into four years of the RevPAR improvement portion of the cycle, so if I’m developing a new asset or underwriting the acquisition of a new asset, I may not be underwriting a recession in the next two years, but I’m not underwriting 5%, 6% or 7% (RevPAR) growth for the next five years,” he said.
Where’s the money?
Plenty of financing is available to fund hotel acquisitions and development, the panelists said.
“We’re seeing a wider range of banks doing financing for hotels—everything from small to large institutions,” said David Sangree, president of Hotel & Leisure Advisors. “They don’t always have a lot of experience with hotels, so we’re seeing a lot more banks in the industry that weren’t there just a few years ago.”
Ed Walsh, president of Alpine Realty Capital, said while there is a wide spectrum of financial sources working in the hotel industry, some smaller banks aren’t yet lending on new-construction projects.
“You’re not going to see substantive supply growth until you can get construction financing at 70% to 75% (LTV) because it is unreasonable to expect an individual or small group to be able to raise 35% or 40% equity,” he said, noting he’s working on a development project in which several smaller banks said they would lend the money but only up to 60% or 65% LTVs. “Other lenders are willing to go to 70% or 75%, but the smaller and mid-sized banks aren’t quite there yet.”
Foreign investment continues to flow into the United States hotel investment market, the panelists said.
“The U.S. to most foreign investors still feels really cheap, even New York, even San Francisco, even luxury resorts,” Sparks said. “If you compare (the U.S.) to London or anyplace in Europe, or even the big Asian capitals, we’re cheap, cheap, cheap. As long as there are people overseas with money who want to be here, there will be good opportunities.”
New hotel development, while somewhat muted, continues to be a factor in certain markets.
“We’re in the ground in downtown Chicago,, and we’ll be in the ground in downtown Columbus (Ohio) and downtown Ann Arbor (Michigan) and a few other spots,” said Bhavin Vivek, director of business development and portfolio management for First Hospitality Group. “A lot of it is urban in-fill locations in higher barrier-to-entry markets. It’s not to say it’s impossible to build in those areas. In Chicago, for example, land is still relatively available.”
While downtown first-tier markets are preferred by many developers, new-construction projects are getting done in other locations.
Alpine’s Walsh said he has multiple clients who are building in secondary and tertiary markets.
“They’ve all been financed in the past 12 months, and they’re all in Great Lakes states,” he said. “There’s supply growth,, but it’s somewhat relative. We’re talking about one project in a market of 200,000 people, not six projects in the same market, like we used to see.”
As it always has been, development is a function of availability of money, Meliker said.
“Access to capital is the real barrier,” he said. “If capital is present, (developers) will figure out a way. If capital isn’t present, they don’t have a choice, and they’re not building.”