Is it time to buy, build or bolt?
01 DECEMBER 2015 7:19 AM
Every phase of the hotel economic cycle presents opportunities for investors. Now is the time to position your portfolio for the inevitable changes in the environment.
Every hotel industry cycle is shaped by forces that are specific to that current economic environment. The cycle we’re in now is no different, but it’s crucial for investors to position themselves to take advantage of the shifting dynamics we all know are ahead.
Whether you believe we’re at the apex of the cycle or better days are behind us, there are plenty of opportunities to capitalize on the current marketplace. In a nutshell, your options come down to just a few—buy, build or bolt from the industry. (Of course, the fourth option is to stand pat, which is not a bad idea under most scenarios).
When the industry is in flux both buyers and sellers start thinking about making deals. On a macro level, there’s been a lot of talk and some action regarding brand company and portfolio sales. Blackstone Real Estate Partners has already pulled the trigger on the $6-billion purchase of Strategic Hotels & Resorts and other less-publicized deals are happening all over the industry, with more certain to come.
The real headline grabbers have been the rumors surrounding possible sales of brand companies. After reports that Hyatt Hotels Corporation was courting Starwood Hotels & Resorts Worldwide, Marriott International on 16 November announced its planned acquisition of Starwood, pending the close of a final deal. Other rumors have AccorHotels in talks to buy FRHI Hotels & Resorts, whose brands include Fairmont, Raffles and Swissotel.
This speculation reminds me of 2006 and 2007, when rumors of other big deals swirled around the industry. The speculation culminated with Blackstone’s mega-deal to buy Hilton Hotels. Soon after came the Great Recession, the hotel industry tanked and it seemed as though Blackstone had purchased the proverbial pig in a poke.
Of course, Blackstone, whose executives are the smartest guys in any room, had the last laugh when the company took Hilton public last year and retained a 76% stake in the company, realizing an initial profit of nearly $10 billion.
This year, Blackstone has been busy with other acquisitions in and out of the hotel industry. In July, it bought a 15-hotel select-service portfolio for $203 million, and in May it purchased six hotels from CSM Corporation.
When Blackstone or other private equity is buying it often means someone is bolting from an investment. In 2007 before the crash, uber real estate investor Sam Zell unloaded a massive office portfolio to Blackstone for $39 billion. And recently, Starwood Capital paid Zell $5.4 billion for a group of suburban apartments. Perhaps Sam is ready to bolt again.
Betting on the new
While the Blackstones and Starwood Capitals are busy playing Monopoly, other hotel industry investors are continuing to bet on new construction. Sure, there’s plenty of worry that supply growth will soon catch up to increases in demand, leading to slower occupancy and rate growth and perhaps another industry downturn. But the growth rate of new hotel supply continues to hover around 1%, well below the 20-year average of 1.9%.
As STR’s Jan Freitag recently wrote, the runway still seems clear for further hotel development, especially of full-service properties. According to Freitag, about two-thirds of the 132,000 hotel rooms under construction are select-service properties in the upscale and upper-upscale segments. (STR is the parent company of Hotel News Now.)
He believes eventually there might be a shortage of full-service hotel rooms, as existing properties age and not that many new ones get built. Occupancies are already strong in this segment, and group business continues to improve so there’s room for more full-service development.
Of course, there is another way of looking at this data. Even with the rush to build select-service hotels, there still are plenty of markets where new additions to the supply won’t be a problem. After all, it’s still a street-corner business. On the flip side, other markets seem to be reaching saturation levels so it will be difficult to find those niches to fill.
No one knows for sure what lies ahead for the hotel industry, at least beyond the next 12 months or so. But smart investors, developers and operators realize they can make money in any environment, if they’ve planned accordingly and understand where the best opportunities lie.
The opinions expressed in this blog do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Bloggers published on this site are given the freedom to express views that may be controversial, but our goal is to provoke thought and constructive discussion within our reader community. Please feel free to comment or contact an editor with any questions or concerns.