Global investors flood New York City market
 
Global investors flood New York City market
19 MAY 2015 6:39 AM
High yields and the stability of the U.S. economy are sparking interest in the New York City hotel market by investors from China, the Middle East and elsewhere around the globe.
NEW YORK CITY—The New York City hotel market is for sale, and global investors are buying. 
 
According to a report from JLL, in 2014 offshore investors spent $1.9 billion in hotel acquisitions in the city, or about 50% of all transaction volume for the year. This year, including the $1.95-billion sale of the Waldorf Astoria New York to Chinese insurance company Anbang that closed in February, foreign investment in New York City hotels could reach $3 billion, according to JLL.
 
Much of the offshore investment flow is coming from Chinese investors, which are forecast to spend as much as $5 billion this year on global hotel purchases, said JLL.
 
“On a relative basis, the United States has been and probably always will be the safest place on the planet to invest. It is the world’s safety deposit box,” said Daniel Lesser, president and CEO of LW Hospitality Advisors. “If you’re going to narrow in on Chinese, the population has clearly accumulated a lot of wealth in the past decade.”
 
Investment dollars also are flowing from the Middle East and, to a lesser extent, Europe, said Gilda Perez-Alvarado, executive VP of JLL’s Hotels & Hospitality Group and the company’s America’s representative on its Global Hotels Desk.
 
“The Middle East has historically been very active in New York City, and we’re seeing appetite still coming from that part of the world,” she said. “At the beginning of the year, we were a little concerned in terms of what impact oil prices will have on their investments. But a lot of these groups looking to invest abroad are private individuals who still see the U.S. as a good bet from a long-term perspective. Also, there are sovereign wealth funds whose mandates are to invest abroad.
 
“Europe is still active but somewhat muted. For Latin Americans, New York hotels are a little bit too large for their investment criteria,” Perez-Alvarado said.
 
An attraction to stability
Sources said a number of factors account for the increased interest in New York hotels by global investors. The stability of the U.S. economy and the high levels of performance of the hotel sector are two dominant themes.
 
“The reason (overseas investors) are focused on real estate within the hospitality industry is simply yield,” said Bradley Burwell, VP of CBRE Hotels. “There is always a spread difference (in yields) from Treasuries up to corporate bonds to real estate. We’ve gotten to a point where yields are so low on other investment mediums that capital is focusing its efforts on things like hotels.”
 
While New York has been a long-time target for global investors, the timing of recovery from the recent recession makes it a particularly hot market today, said Sean Hennessey, CEO of Lodging Advisors.
 
“Following the downturn after the Lehman Brothers collapse, the New York City hotel market was one of the first to recover in the U.S.,” he said. “We started to see a recovery here when other markets were still decelerating. And it has always been perceived as being a more stable market, and there is a high degree of allure associated with New York.”
 
Hennessey said hotels in particular are seen as a strong investment class by global investors.
 
“When it is doing well as it is today, the return economics of the hotel industry are extremely attractive,” he said. “You can own a relatively small hotel in Midtown (Manhattan) and during good years it can be throwing off as much profit as a million-square-foot office building next door.”
 
The new class
A new class of global investors has become active in New York, Lesser said.
 
“There are rising middle classes in China and other parts of the world that didn’t exist before, and they are now taking advantage of booming credit facilities,” he said.
 
Burwell said this new wealth is expanding the pool of investors exponentially, both in the New York market and elsewhere in the U.S.
 
“We’re now seeing (investment) from medium-sized companies, not just super high net worth individuals but from investors who want a diversified portfolio in the United States,” he said. “Historically, you had Prince (Al-Waleed bin Talal) and other billionaires making investments in New York City, but now people who might have $100 million up to a billion (dollars) are making investments.”
 
Loosening of investment regulations in China also has contributed to the upturn in hotel investment in the U.S., Burwell said.
 
“Deregulation of capital repatriation has made it easier for investment into the U.S.,” he said. “Previously, if you made an investment with Chinese capital of more than $100 million you had to have a government review. That threshold has been dramatically increased, and that is allowing more investors who want to get their capital out to do so.”
 
Beyond trophy properties
Some new investors in the city are looking at properties other than the traditional trophy assets often sought by global investment groups.
 
“Other investment vehicles are targeting mid-market or select-service properties that are generating very attractive yields: 5%, 6% or even above that,” Perez-Alvarado said. “While they’re targeting New York as a very good long-term hotel investment market with very good fundamentals, ultimately they’re looking to amass a portfolio across key U.S. gateway markets to eventually float these assets into a (real-estate-investment-trust) structure. As such, yield is very important to them.”
 
Hotels in Manhattan, and especially Midtown, remain the most desired acquisitions for global investors, Hennessey said.
 
“(Investors) continue to have a fairly narrow view of the types of properties that make sense to them,” he said. “For many of these investors, (a hotel they would acquire) would be their flagship and their most visible property in the (U.S.), so they want to be in the Midtown core in a more traditional location rather than a pioneering type of location.”
 
On the other hand, Lesser sees that trend changing over time with more foreign investment focusing on other property types and in markets other than Manhattan.
 
“Historically, foreign buyers have wanted luxury, irreplaceable assets they see as trophies,” he said. “And while a lot of the recent Chinese deals have fit that profile, as the life cycle of these groups grows over time, you’ll see them investing in secondary markets once they’ve filled their quotas for primary markets.”
 
Will the trend continue?
As strong as the New York market has been, several factors could dampen the enthusiasm for investment from global players. One is the risk of lower returns on investment, Hennessey said.
 
“By their nature, hotels are a very management-intensive asset class, and without the right approach to management and day-to-day oversight it’s certainly possible there could be some underperformance financially,” he said. “There is also risk related to the operating cost structure of hotels, particularly in New York where it is already a very high operating cost market, and particularly a high fixed cost market.
 
“At the luxury level, virtually all of the hotels are unionized, and the nature of the last several labor agreements was such that the union wage and benefit costs are increasing at a greater rate than underlying inflation generally.”
 
One factor that shouldn’t damper investment enthusiasm in New York is the wave of new hotel development in the city, Burwell said.
 
“Foreign investors have the least worry of any investor segments, and part of that is because their capital is looking to stay in these assets for incredibly long hold periods,” he said. “The immediate impact of the new supply doesn’t matter to them. The fundamentals of New York City are so strong they’re not worried about it in the long term.”
 

2 Comments

  • benbethel May 19, 2015 6:17 AM

    Very well-written article. It's interesting to see the interest in NY and CA - I think that 2nd tier cities are where the real opportunities are, as the price per key is lower and the potential for business to shift to these cities as 1st tier cities become simply too expensive for business travelers to conduct business in. Not only are hotel rooms much more expensive, but offices are typically smaller, meeting facilities smaller, more difficult to secure, and much more expensive. Just like the urbanization from farming communities and small towns to major metro areas of America that's taken place in the past decades, I think we've already seen a distinct shift from major 1st tier (Manhattan, Chicago, San Francisco, Los Angeles, etc) cities to 2nd tier (Seattle, San Diego, Dallas, Phoenix, Atlanta, etc) cities in the past 10-15 years. That's where I think the focus on acquisitions needs to be... especially in San Diego and Phoenix - the opportunities there are endless... and we all know (but many are afraid to admit) that eventually we'll form the NAU - North American Union - making Canada to Panama basically borderless, opening enormous opportunities for the region... making cities within about 200 miles of the US/Mexico border areas of enormous economic growth in the next 15-20 years. I'd invest in San Diego, Phoenix, Tucson, San Antonio... but probably not Houston as we come to realize that the industries of oil, energy, and communications are entering the 'free-to-consumer' era in the next 10-20 years, and not Detroit unless it makes a major shift, as we have hit 'peak car' in 1995, and with FAV's hitting the roads the demand for vehicles is going to come a screeching halt when 5-10 people start sharing one vehicle. Anyway, sorry for the rant... to close, the first-tier cities are great solid investments for now, cap rates are really low though, and if those cities become too expensive (they already are for my blood), you'll see a huge shift to those 2nd tier cities very soon...

  • K J Shah May 22, 2015 2:41 PM

    When interest rate goes up for commercial mortgages, fun will begin. Just wait and watch. There was a time Japanese came and bought lots of trophy assets and every one knows how that ended. Greed is Great and fear mixed with greed causes these flood of overseas money in to USA. Good for us though . Let them bring it on to all remaining towns too.

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