Strong fundamentals fuel US resort investment
Strong fundamentals fuel US resort investment
19 SEPTEMBER 2014 11:59 AM
Investors seeking new opportunities are flocking to the resort segment, where resurgent group business, growing global demand and low new supply are all driving a robust recovery.
REPORT FROM THE U.S.—Investors seeking low-price, high-reward hotel assets increasingly are eyeing the resort segment, which is growing more attractive, according to sources. A low amount of new supply, steadily increasing demand and favorable future visitation demographics are just a few key trends driving the boom.
According to hotel experts, the resort sector was slower to initially recover from the recession, because one of the segment’s key revenue sources, corporate meetings, suffered the most during the period. That’s changing, paired with growing leisure demand from domestic and global travelers.
“One of the areas of the industry that we identified as being particularly robust and a very, very strong investment opportunity, is the resort segment,” said Arthur Adler, CEO for the Hotels & Hospitality Group in Americas at Jones Lang LaSalle. “It’s a very good time to get in.”
Adler said all of the things that have boosted the hotel industry at large since the recession—slow supply growth, and slow and steady demand growth—are even truer for the resort industry today. 
According to STR, parent company of Hotel News Now, occupancy rose 3.1% year to date through July for the segment in the United States. Average daily rate grew 4.3%, and RevPAR surged 7.5%. 
Because non-resort hotels focus more on transient and corporate demand, these properties recovered from the recession first, but with corporate meetings back on the rise, it seems resorts are finally catching up, sources said. 
“It’s delayed recovery, but (group) bookings have increased dramatically,” Adler said. “Companies are starting to spend more money on incentive travel, on meetings and strategy sessions and on client events. What used to be kind of taboo—taking clients and employees to fancy resorts—is now becoming significantly more accepted.”
A dry pipeline
In addition to an improved demand perspective, supply fundamentals have been highly favorable for resorts. With development capital nearly unobtainable for new-build projects and replacement costs still well below new construction, new supply in the resorts market remains minimal.
According to STR, U.S. resorts saw an increase of room supply year-to-date July of 0.7%.
“Resorts can be acquired at well below replacement cost. It’s not economically feasible to develop a large-scale resort at this time, and financing is extraordinarily difficult,” Adler said. “You can buy cheaper than you can build, and it takes a long time to assemble a site, requires significantly more infrastructure, more land, more recreational amenities and more meeting space than a traditional hotel.”
That’s not to say it’s not happening, under the right circumstances, sources said. While the new supply might be relatively small, there are still major new resorts underway in select markets. The key, according to investors, is finding the opportunities where the potential still outweighs the risk and comparatively high capital investment.
“Resorts are not for the timid. There certainly needs to be a lot of courage to develop resorts, because you’re herding demand, and not stealing it,” said Gerry Chase, president and COO of New Castle Hotels & Resorts, which owns several resorts in the U.S. and Canada, including the new-build 200-room Westin Jekyll Island in Georgia set to open in 2015. 
“The limited new supply is really the result of it being a high-risk, high-reward business, and there’s not that many big capital players or funds out there that are willing to take that kind of chance. So it’s a limited universe,” Chase said.
He said New Castle opted to build the Jekyll Island property for specific reasons, namely an ongoing relationship the company had with the island, having already built a 138-room Hampton Inn & Suites there. When the island decided to construct a new convention center and boost its corporate meetings profile, the Westin project was a no-brainer for the company. 
“It made sense for us to build the Westin Jekyll Island next to the convention center, right there on the beach,” Chase said. “So not only do we have the opportunity to tag onto a destination that already exists, we also have a new demand generator—a very upscale, state-of-the-art new convention center—that will offer additional demand to help ensure the success of the resort.”
Let’s make a deal
Investors looking to dig deeper into the resort game are opting to buy, and sources said there are still bargains to be had, especially in markets such as the Southwest, Southeast and Pacific Mountain regions. Prime markets such as South Florida, Southern California and New York are also perpetual candidates, if investors are willing to pay the price.
“The resort sector, selectively, is one of the last opportunistic investments in the hotel sector in the United States,” said Joe Smith, founder and CEO of 1754 Properties, which has been selectively acquiring assets across the country. “A lot of core assets in San Francisco and New York have already recovered. They’re fully priced if you want to buy them, and it’s difficult to get yields that are attractive. But resort properties in the Southwest, for example, those markets have still struggled and haven’t recovered yet.”
Smith said 1754 recently acquired the La Posada in Santa Fe, New Mexico, and is converting the asset to join the Luxury Collection from Starwood Hotels & Resorts Worldwide. He estimates the market there is still roughly 20% below peak levels for ADR and occupancy, but he’s optimistic the recovery will come in time.
“For the investor who wants to get a low basis in an asset, in a quality asset with good upside in the future, some of those resort properties in markets like Southwest offer that opportunity, where you really don’t get that opportunity in most major markets around the country,” Smith said. “They’re already performing well, so they’re already priced much higher.”
There are all kinds of players in the acquisition market, too, from smaller, opportunistic private equity buyers to real estate investment trusts to large-scale conglomerates. However, the increasing presence of REITs in recent years is a key indicator of the resort sector’s perceived status as a strong, sound investment. Smith points to Hersha Hospitality Trust’s recent $100-million acquisition of the Parrot Key Hotel & Resort in Key West, Florida, as a prime example of more of what’s to come.
“As an institutional asset, I don’t see REITs shying away from resorts,” Smith said.
The prices won’t stay low for long, though. Resort performance, and resulting valuations, is expected to only increase across the board in the future. Experts predict that over the next 10 to 20 years demand will greatly benefit from the baby boomer population, as well as steadily increasing global visitation. All this and more makes now a great time to buy, according to sources.
“In the industry overall, values on a per-key basis are about 103% of peak values,” Adler said. “Resorts are still below peak values, at 93%, so there’s still more room for value appreciation.”

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