by Daniel H. Lesser

As we enter 2015, U.S. lodging fundamentals are the most robust I can recall during my 35 year career. Rarely has there been a point in time when the stars have been aligned and the market generally favorable to buy, sell, and develop hotels in the U.S. At this juncture many question whether the U.S. lodging industry is experiencing a paradigm shift or if what is occurring today merely represents the re-run of a movie that seasoned market participants have seen before.

A growing, albeit modestly, U.S. economy, emerging domestic energy markets, declining gasoline prices, and strengthening consumer confidence represent positive underpinnings for the lodging industry. Developing middle classes throughout the globe are creating new travelers that want to explore and see the world, in particular the Unites States of America. Additionally, foreigners perceive the U.S. as the gold standard destination for investing and preserving capital. Group demand for transient accommodations has finally rebounded to prior peak levels and relatively limited construction financing for new hotel development has positioned the industry to achieve occupancy levels not seen for thirty years. Advances in technology continue to increase operational efficiencies contributing to more than $40 billion in industry net operating income.

Several new U.S. transaction records occurred this past year. The LW Hospitality Advisors (LWHA) 2014 Major U.S. Hotel Sales Survey includes 153 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $16 billion, and included approximately 45,000 hotel rooms with an average sale price per room of just over $350,000. While U.S. hotel transaction activity has remained steady, per room pricing has increased dramatically. By comparison, the LWHA 2013 Major U.S. Hotel Sales Survey identified 154 transactions totaling roughly $11 billion including 45,000 hotel rooms with an average sale price per room of nearly $243,000. Comparing 2014 with 2013, the number of trades has remained flat while both total dollar volume and sales price per room have increased an impressive 45 percent.

Notable observations from the LWHA 2014 Major U.S. Hotel Sales Survey include:

  • Two extraordinary trades include the announced $1.95 billion sale of the Waldorf Astoria New York and the $1.73 billion paid for the Cosmopolitan of Las Vegas;

o It is interesting to note that Hilton Worldwide which is majority owned by Blackstone Group LP sold the Waldorf Astoria New York, and Blackstone Group LP was the purchaser of the Cosmopolitan of Las Vegas;

o The $1.95 billion sale of the Waldorf Astoria New York is the largest ever sale of a U.S. hotel;

  • The $1.86 million per unit trade of the 210 room Park Hyatt New York represents a new national per room sale high water mark;
  • New York and San Francisco have been the most active transaction markets;

o New York had eighteen major single asset trades for a total of more than $5 billion or an average price per key of just over $750,000;

o Of the Top 10 U.S. Hotel Sales by Price Per Room, five occurred in New York;

o The San Francisco Bay area had six major sales for roughly $550 million or an average price per key of more than $400,000;

  • Thirty six 2014 transactions totaling more than $10.5 billion sold for more than $100 million each, compared with 2013 when thirty sales for more than $100 million each, totaling just over $6.0 billion occurred. The increase in volume compared to 2013 at prices above $100 million was a striking 75 percent;
  • Hotel trades in Seattle, Nashville, New York, San Francisco, and Portland have set new local per room prices.
  • Million dollar plus per room U.S. hotel pricing is becoming more prevalent than ever before as evidenced by the three 2014 U.S. trades that occurred at approximately one million dollars per room including: Park Hyatt New York ($1.86 million per room), the Waldorf Astoria New York ($1.38 million per room), and the St. Regis Bal Harbour in Florida ($1.014 million per room). During 2013 there were four million dollar plus per room U.S. hotel trades.

The U.S. hotel investment market in terms of dollar volume and price per key are clearly on the rise. With a deepening buyer pool, owners are bringing assets to market and investors that include a variety of institutional public and private funds, regional owners/operators, domestic and overseas family offices and high net worth individuals are strongly competing for high quality properties. Active sellers include institutional public and private funds, as well as brand hotel companies in cases where they can retain or establish long term management. With significant amounts of domestic and overseas capital seeking cash flow to replace anemic fixed-income returns, the U.S. hotel sales transaction market will continue to gain traction. Yield sensitive capital is aimed at relatively new branded select service hotel product that represents well positioned cash-flowing assets. Institutional buyers appear willing to pay healthy prices, particularly when offered in a portfolio, allowing investors to deploy additional capital in a single transaction. At this point in the cycle there are no true ‘off-market’ prospects, and there surely are no steals or bargains to be had for appealing hotels that offer positive in-place cash flow as well as properties that offer obvious value enhancement opportunities. The significant amount of equity chasing deals and the rising cost of acquisitions are prompting some investors to explore new hotel development opportunities in lieu of purchasing existing assets.

A re-emergence of the CMBS market has been the main driver of the abundance of debt capital available for the sector, and the pool of lenders is now broadened to include balance sheet lenders, life companies, banks, and debt funds. Relatively low interest rates continue to support favorable capitalization rates motivating sellers to transact. Approximately $188 billion in commercial mortgage loans reach maturity between 2015 and 2017. Unless interest rates rise at a quicker-than-expected pace, borrowers on most of those loans will be able to refinance. As the current growth cycle matures, the expectation of continued improving industry metrics will inject greater investor confidence in the lodging sector consequently leading to higher values.

The U.S. lodging industry faces significant challenges including rising costs of employee wages and benefits and the expanding power of hotel labor unions. Additionally, technological advances continue to allow greater influence of third party on line travel sites and disrupters such as Airbnb, all of which create negative pressure on hotel room rate pricing. If upheld by the courts, the National Labor Relations Board recent determination holding McDonald’s Corporation a joint employer with its franchisees raises serious concerns with long-term implications for brand hotel licensing. Finally, event risk clearly is at the top of the spectrum of uncontrollable forces that can dramatically and swiftly negatively impact the hotel business. While plenty of macroeconomic and political uncertainties exist, these issues have not (yet) affected business investment and consumer confidence. In the current climate, investments in U.S. lodging assets are generally perceived to offer the most attractive growth profile of any real estate sector. Is the U.S. lodging industry experiencing a paradigm shift or is what is occurring today merely the re-run of a movie seasoned market participants have seen before? Only time will tell.

This article originally appeared on GlobeSt.com and is reprinted with the authors permission.