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How the Upcoming Election Could Impact Hotel Investment in 2013

by Geoff Davis
November 2, 2012

With what is sure to be a close and highly contested election upon us, it would be wise to reflect on how significant the impact of that election could be on hotel investment in the near future. The hotel industry continues to recover, with robust growth in occupancy and rate this year. The forecast for REVPAR (Revenue Per Available Room) growth for 2012 is forecast at approximately 7 percent. Well ahead of GDP growth and a beacon of hope in an economy that continues to struggle. This growth in operating performance has been a catalyst for increased investment activity in the hotel sector. Our own volume of closed transactions this year is up in excess of 80 percent over 2011. Buyers and sellers are more in equilibrium on value, and some of the activity is no doubt reflective of the desire to close transactions this year. Consider the following impacts on hotel investment:
  • The potential impact of increased capital gains taxes. The two Presidential candidates have a very different view of where tax rates should go. Romney favors keeping the current capital gains rate at 15 percent for the two percent of households making in excess of $200,000 a year and eliminating it for everyone else. Obama wants capital gains to rise to 23.8 percent, 3.8 of which goes to help pay for the health care bill. For real estate investors, billions of dollars are riding on the outcome of the election. Without the ability to reward risk, investor may pull back from investing, or it may have the net impact of increasing cap rates and hence, lowering values.
  • Increased costs at the property level decrease value. In speaking with hotel investors the impact of the health care reform act will be to cut the number of full time employees with benefits and move toward a more part time work force, or to simply eliminate company health plans and pay the fines. There are also increased concerns over the impact of the Employee Free Choice Act (EFCA) on the cost of labor. We have already seen a trend in certain markets to outsource tasks such as housekeeping in order to keep costs in check. Most hotel owners I speak to are not anti-labor, but they clearly want to have the ability to moderate their labor force in the face of rapidly changing economic conditions.
  • Debt continues to be the Elephant in the Room. If you have a performing asset, debt is cheap and available. However, looming is the prospect of billions of dollars of maturity defaults that will occur in the next three years. There is currently no effective way to refinance these loans at par, write downs must occur at some point, and there needs to be more liquidity in the market to avoid a future capital markets melt down part 2. The Fed needs to find a way to jump-start the CMBS market, which is operating at a fraction of traditional levels. Restrictions on the creativity of market to find cost effective bridge financing for problem loans will only choke value and reduce the appetite for investment.
  • The World is a Small Place. Of course investor sentiment can change in a heartbeat. The Eurozone hangover, the possibility of another war in the Middle East, drought, the value of the dollar and many more issues can impact tourism and travel, as well as investment in the hotel sector.
Contrary to past cycles, in this cycle the hotel industry seems to be leading a recovery and as such, makes for an attractive investment opportunity. The yield on assets is there. The ability to buy assets at a discount and reposition them is there. Selective ground up development is starting to come back, but new supply remains muted, hence making existing assets attractive. The good news is the country needs jobs, and the hospitality industry has been a beacon of hope in that arena. Both candidates recognize travel and tourism as a clean industry and a great provider of jobs to the working and middle class. Obama sponsored the Travel Promotion Act, and Romney is a former board member at Marriott. They both get that the hotel industry is good for America. The differences lie in the approach to all the items that impact both hotel operations and investment in the sector. Despite the outcome of the coming election hotel investors will continue to invest, but it could be a very different playbook next year if regulation and taxes dominate the consciousness of hotel investors.


About the Author:
Geoff Davis is President & Senior Principal HREC Investment Advisors and may be reached at gdavis@hrec.com.


For additional information, please contact:

Geoff Davis
President & Senior Principal
HREC Investment Advisors
gdavis@hrec.com
www.hrec.com



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