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The Looming Baby Boomer Impact


Spring 2007

Ho-Hum…Another Quarter, Another $5 Billion in Deals
Strong Transaction Pace and Prices Continue in 2007

In today’s market, the strong deal pace and high pricing has become rather commonplace.  It does not surprise anyone that the average sale price for upscale and luxury hotels is well over $200,000 per room. It does not shock anyone that homogenous lodging structures in major markets are able to garner prices once reserved for trophy assets. And it will not faze anyone to hear that the transaction level for 2007 will in all likelihood exceed $15 million for the third straight year.

In fact, transaction volume could potentially be higher if there were more assets on the market. There remains a significant amount of capital allocated for lodging investments.  While finding an attractive investment opportunity may not be difficult, actually winning the asset or portfolio in a competitive bid process is.

Regardless, there are some early indications of lodging investment activity beginning to taper. The number of transactions has experienced a modest decline year over year from 88 in the first quarter of 2006 to 76 during the same period of 2007. Moreover, the acquisitions volume dropped from $6.7 billion in the first quarter of 2006 to $4.8 billion in the first quarter of 2007. Whether or not 2006 was the peak of the current investment cycle will become much clearer over the next few months.

U.S. Upscale and Luxury Lodging Transactions Since 1996

Source: Hospitium
The average deal size during the first quarter of 2007 has bounced back to a more reasonable level that is inline with historic trends. The average price per asset in 2006 exceeded $80 million. This was an enormous increase from 2004 and 2005 when the average sale price was $53 million and $57 million, respectively. The average asset price during the first quarter of 2007 is approximately $60 million, which represents an average annual increase of 9.8% since 1996.

Although fewer properties traded that involved residential upside, the average price per room has maintained a strong level during the first quarter. The average price per key was $236,000 in the first quarter. This is slightly lower than the record price per room of $243,000 achieved in 2006.

We anticipate the price per room for 2007 to remain well above $200,000, albeit lower than last year’s peak. We project the 2007 price per room for upscale and luxury properties to be approximately $224,000.

Source: Hospitium
Big Deals

The top six sales of the quarter are properties located in major urban markets, led by the sale of the Westin Boston Waterfront at over $300 million. As shown earlier, three of the largest transactions in early 2007 involved assets located in Boston, namely the new Westin Waterfront, the Marriott Long Wharf, and the Ritz-Carlton. The Doubletree Guest Suites Times Square in New York, the Renaissance Mayflower in Washington, DC, and the Hyatt Regency San Francisco rounded out the largest deals over the past quarter.

Unlike 2006, we have yet to witness any transactions in 2007 that have threatened the $1 million per key barrier. This too is a result of the lack of properties that traded with residential economics involved. The 30-room Kenwood Inn & Spa in the Sonoma Valley garnered the highest price per room in early 2007 at $660,000 per key. The Doubletree Guest Suites Times Square and the Ritz-Carlton Boston also surpassed the $600,000 per room threshold at $632,000 and $622,000, respectively.

Top Individual Upscale & Luxury Transactions by Sale Price
1st Quarter 2007
Sales Price 
Westin Boston Waterfront 
Doubletree Guest Suites Times Square 
Renaissance Mayflower 
Marriott Boston Long Wharf 
Hyatt Regency San Francisco 
Ritz-Carlton Boston 
Source: Hospitium
Looking Ahead

The transaction environment is expected to remain highly active for the remainder of 2007. Ashford Hospitality Trust’s portfolio acquisition of CNL Hotels & Resorts’ assets, as well as Walton Street Capital’s purchase of Crescent Real Estate Equities’ lodging investments and the pending sale of the Maui Prince Makena Beach, will boost volume going into the second quarter.

As previously mentioned, we estimate the total number of deals and capital volume to taper from 2006’s level. Nevertheless, 2007 is anticipated to experience close to $18 billion in upscale and luxury property transactions. The average price per room is forecast to taper slightly from the $243,000 per room in 2006.

U.S. Upscale & Luxury Lodging Facilities
Transaction Volume
2006 TTM  Q1 2007  Forecast 2007  +/- 07 vs 06
Properties  263  251  240  (8.7%)
Rooms  88,755  83,830  80,400  (9.4%)
Acquisitions  $21,300,000,000  $19,100,000,000  $18,000,000,000  (15.5%)
Price/Room  $243,000  $237,000  $224,000  (7.8%)
Source: Hospitium
High Net Worth Investors

Bill Gates, Michael Dell, Ty Warner. This may sound like the guests on CNBC’s Squawk Box, but it actually represents three of the top investors in trophy lodging assets over the past few years. The luxury lodging sector has always been considered the sexiest asset class in the real estate industry and has often attracted affluent investors from outside the hospitality and real estate fields. Some notable forays into the sector:

  • Laurance Rockefeller created RockResorts in 1962.
  • Caroline Hunt established Rosewood Hotels & Resorts in 1979.
  • Charles Keating built the Phoenician and the Crescent in the late 1980s.
  • Fess Parker built his Doubletree Resort in 1986 and acquired the Grand Hotel in 1998.
  • Robert Rowling acquired Omni Hotels in 1996.
  • Earl Holding bought the Westgate in 1976 and built the Grand America in 2001.
In more recent times, Ty Warner and Michael Dell have acquired over $1 billion in luxury properties; Steve Case has been the primary backer of Exclusive Resorts; Bill Gates’ Cascade Investment has teamed with Prince Alwaleed Bin Talal’s Kingdom Hotels to bring Four Seasons Hotels private in a $3.37 billion deal; and Andre Agassi and Steffi Graf are developing the Fairmont Tamarack Resort.

The interest in luxury hotel and resort assets by ultra-wealthy individuals will certainly continue.  They tend to be long-term investors and are generally more capable of weathering a downturn in the economy. While typical hold periods for lodging facilities has been between 5 and 7 years during the current investment cycle, high net worth investors often hold assets for 10 to 20 years or more.

High Net Worth Buys

Property Rooms Date Price Price/Room Buyer
Four Seasons Hualalai  243  Jun-06  $285,411,000  $1,174,531  MSD Capital, Rockpoint Group
Miramar  213  May-05  43,000,000  201,878  Ty Warner Hotels & Resorts
Kapalua Bay  196  Sep-04  48,300,000  246,429  Exclusive Resorts, Maui Land & Pineapple, Marriott Int'l
Four Seasons Maui  380  Jul-04  270,000,000  710,526  MSD Capital
Kona Village  125  Aug-03  60,000,000 480,000  Ty Warner Hotels & Resorts
San Ysidro Ranch  38  Sep-00  15,400,000  405,263  Ty Warner Hotels & Resorts
Four Seasons Biltmore Santa Barbara  217  May-00  150,000,000  691,244  Ty Warner Hotels & Resorts
Four Seasons New York  370  Mar-99  275,000,000  743,243  Ty Warner Hotels & Resorts
*Four Seasons Hualalai price does not reflect excess real estate included in transaction
Source: Hospitium

Four Seasons Hualalai 
72-100 Ka`upulehu Drive
Ka`upulehu-Kona, Hawaii

Four Seasons Maui
3900 Wailea Alanui
Wailea, Maui, Hawaii

The Pending Megatrend That Will Change the Industry
Retired Baby Boomers will Catapult Leisure Demand into a New Dimension

The impact of macroeconomic trends, and the aging baby boomer generation in particular, is a hard factor to ignore and even harder to precisely quantify. Beginning in 2008, the elder members of the baby boomer club will turn 62, which also happens to be the average retirement age in the United States.  The fact that the population of retired people will increase each of the next 15 to 20 years is enough to get many investors excited about the long-term trends for leisure travel.

However, that is merely the tip of the iceberg. The spending tendencies, retirement savings, and inherited wealth that the baby boomers bring with them is what will make their impact exponentially dynamic.  The 2000 census tallied almost 35 million people over 65 years of age. By 2030, that number is expected to more than double.  Between 2007 and 2030, the population of citizens over the age of 65 is expected to increase 2.8% annually. The rest of the nation’s population is only anticipated to grow 0.5% annually during that timeframe.

U.S. Population Labor Status 2000-2030

Source: U.S. Census Bureau
Generational Cause and Effect

It is hard to believe that the forthcoming economic environment originated almost a century ago. The Greatest Generation, as dubbed by Tom Brokaw, set the stage for what could be the biggest economic growth period in U.S. history. Toughened by the struggles of World War I, the Great Depression, and then World War II, the pre-Boomer generation’s experiences forced them to develop conservative financial habits.

The baby boomer generation’s spending habits stand in stark contrast to those of their parents. Baby boomers generally enjoy being pampered and tend to make more use of their disposable income. This is certainly evident in how today’s vacations differ from those of yesteryear. In the middle of the twentieth century, road trips were the primary means of family travel and roadside motels were the typical accommodations. Today, travel by plane is far more prevalent and full-service resorts with golf courses, spas, and water parks are the preferred family destinations.

Moreover, baby boomers will have even greater financial means to travel and spend more freely. Baby boomers are set to inherit an astounding $10 trillion from the prior generation. This will not happen overnight, but rather over the course of the next 20 to 25 years.

The spending habits and inclination to take pleasure in the finer things in life are predicted to translate into significant increases in travel, and consequently a steady rise in demand for luxury resort accommodations, whether in the form of hotels, timeshares, destination clubs, or residential units. It will also undoubtedly create more dining covers, spa treatments, and golf rounds, as well as the need for other ancillary services.

Over the past decade we have already witnessed the rise in ownership of second (and third) homes as well as the increasing demand for timeshares. This is just the beginning of a long-term trend that is forecast to continue for at least another quarter century.

U.S. Population Age Distribution
2007 vs. 2030

Source: U.S. Census Bureau
Extended Retirement

Baby boomers will also have many more years to enjoy their retirement, with the average retirement age declining and life expectancy on the rise. Between 1950 and 2000, the average retirement age slowly declined from 67 to 62. Many debate whether this downward trend will continue given the concerns surrounding social security and the shift of retirement risk from the government and Corporate America to individuals. Nevertheless, if this trend does in fact continue, individuals’ retirement years will begin sooner than expected.

Today’s life expectancy in the U.S. is 78 years of age, and it is rising each year. By the time all of the baby boomers hit retirement age, life expectancy is projected to surpass 80 years old. The average baby boomer is anticipated to have close to twenty years of retirement during which they are expected to enjoy life through travel, entertainment, education and relaxation. This is vastly different from the reality of the mid twentieth century when life expectancy and the typical retirement age were only a year or two apart.

One of the fears that many see forthcoming in the middle of the twenty-first century is the economic fallout after the baby boomers pass on. However, habits that the baby boomers and their offspring have started are anticipated to have a snowball effect on the younger generations. While the newlybranded “Generation Me” is not as populous as the baby boomer generation, they will have extensive buying power and will certainly look to spend it.

As with most parents, baby boomers and their offspring continuously wanted to ensure that their children and grandchildren were better off than they were growing up. While prior generations often shared bedrooms, toys, and other possessions, the younger generation has become a generation of privilege. They generally have been pampered with the latest and greatest toys and gadgets, be it an X-Box, a computer, an iPod, a cell phone, or a car. Their expectations will remain high, as they will not settle for inferior products or services. They will be accustomed to being pampered and living a life where nothing is unattainable. Moreover, they have become accustomed to instant gratification, no longer waiting for a certain point in the future to achieve or obtain something.

This bodes well for all facets of the upscale and luxury lodging sectors. Generation Me’s willingness to spend for high-end facilities, amenities, and services make them ideal customers for extravagant hotels and resorts.  Whether or not this bodes well for society as a whole is subject matter for another discipline to analyze.

Hospitium is a hotel consulting firm that specializes in the upscale and luxury sectors of the lodging industry. From the early stages of development or deal negotiation through asset disposition, Hospitium delivers timely and useful research, analysis, and insight that assist the various needs of owners, developers, management companies, and financial institutions. Hospitium provides a wide array of advisory services and products, including feasibility studies, due diligence, underwriting, appraisals, and strategic planning.

Stephen Hennis has over thirteen years of experience in the analysis of lodging investments. Prior to becoming Managing Director of Hospitium, Mr. Hennis served as Vice President of Hospitality Investments for Lowe Hospitality Group and Destination Hotels & Resorts. During his tenure at Lowe, he was involved in the underwriting, negotiation, and acquisition of over $400 million in luxury hotels and resorts. Mr. Hennis previously served as Vice President and Director of Research for HVS International where he specialized in the analysis and valuation of large portfolios for cross-collateralized securitizations and oversaw the redevelopment of HVS’ analytical models. At HVS, Mr. Hennis appraised and evaluated over 500 lodging facilities. Mr. Hennis is a graduate of the University of Denver’s School of Hotel, Restaurant & Tourism Management.

Data and information for the Lodging Ledger is collected by Hospitium, LLC. Hospitium, LLC is merely a conduit for the data, and assumes no responsibility or liability for its accuracy, usability, confidentiality, or other matters related to this survey. Information herein is believed to be reliable and has been obtained from sources believed to be reliable, but its accuracy and completeness cannot be guaranteed. Use of the data herein may not be resold, distributed or otherwise utilized for commercial use or profit without the expressed written consent of Hospitium, LLC.


Hospitium, LLC
Stephen R. Hennis, CHA 
Managing Director
14234 West 86th Drive
Arvada, Colorado 80005

Also See: The Lodging Ledger / Skyrocketing Transaction Volume and Pricing / Investment Timing is Key / Steve Hennis / February 2007
The Lodging Ledger / Hotel Deals Continue to Roll Along, The Allure of Luxury Lodging Assets, The Next Wave of Mega-Resorts / Steve Hennis / October 2006
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