Hotel Investment Market Bottoms
Out; But Caution Abounds
May
6, 2010 - Annually, the members of the hotel�s industry�s preeminent think
tank, �LIIC � The Lodging Industry Investment Council�, are surveyed to
develop a list of the major hotel investment opportunities and challenges
for the coming year. This exhaustive survey results in the LIIC Top Ten;
a highly regarded profile of investment sentiment and attitudes for the
lodging industry for the forthcoming 12 months.
All together, the members of LIIC represent acquisition and disposition
control of billions of dollars in lodging real estate. The hospitality
industry�s most influential investors, lenders, corporate real estate executives,
REIT�s, public hotel companies, brokers and significant lodging equity
sources are represented on the council. LIIC serves as the leading industry
think tank servicing the hospitality business (www.liic.ws).
This year�s survey was compiled by LIIC�s co-chairman, Mike Cahill.
Mr. Cahill is CEO and founder of HREC � Hospitality Real Estate Counselors,
a leading international hotel and casino advisory and brokerage firm specializing
in lodging property sales, debt refinancing, consulting, appraisals and
litigation support. (www.hrec.com).
1. Hotel Investment
Market Bottoms Out, But Caution Abounds: Compared to last year, hotel
investment market participants believe the worst is over, both from the
perspectives of operating fundamental and investment risk perception. Transaction
activity (property sales volume) is forecasted to increase significantly
with higher values for sellers. However, uncertainty over macroeconomic
issues still loom, producing an overall mood best characterized as �cautious
optimism�.
2. Lodging Real Estate Values
Rebounding: 75% of respondents believe that hotel real estate values
will increase over the next 12 months, with 42% of total responders predicting
a significant increase of over 5%. This is in sharp contrast to last year�s
survey when 81% believed values were decreasing.
3. New Investment Cycle?: Interestingly,
only 53% (down slightly from 61% last year) believe we are in the first
inning of a new hotel real estate investment cycle. A substantial
39% think we are still in market limbo, with the new cycle not yet started.
4. Quality and Volume of Product
to Buy? Hotel investors are bemoaned by the lack of available hotels
for purchase (quantity), with 95% responding that available product is
�below average� and �low� in terms of volume. Investors are further frustrated
by the lack of quality (desirable) of assets on the market with 64% believing
that current market product is below average quality. 31% believe
that hotels on the market are of average quality.
5. Where to Find Hotels to Buy?
The
majority of those surveyed believe that the highest percentage of hotels
they buy will come from traditional sources (equity principal to equity
principal). In terms of other sources, an equal percentage of buyers believe
they will get their deals from traditional balance sheet lenders via REO�s/short
sales or buy through acquiring the notes (loan to own). Unexpectedly, in
fourth place, is acquiring REO�s from special servicers.
6. Investors still Cautious:
56% of survey participants believe it is a good time to buy lodging assets
but caution to be extremely selective. A lesser percentage, 28% say now
is definitely a good time to acquire.
7. Are All Cash Buyers King?
Contrary to recent sales activity, 53% of respondents believe that over
the next 12 months, less than half of all hotels acquired will be purchased
on an all cash basis. An interesting quagmire given that the same respondents
consistently cited the lack of suitable acquisition debt financing.
8. Interest Rates to Increase?
47%
of the LIIC think tank believes hotel interest rates (senior debt) will
increase over the next twelve months. 33% believe interest rates are stable.
Hand-in-hand, 53% of respondents believe loan/value ratios will remain
level with a strong minority (38%) being positive thinkers, believing banks
will loosen and increase ratios.
9. Significant Change: Equity
Return Rates Decreasing: Bucking a trend from our 2008 and 2009 surveys,
the majority (50%) of respondents believe that unlevered equity rates will
decrease over the next 12 months reflecting increased competition amongst
buyers for scarce product. Reasons for the decline cited include: lower
perceived risk (increased industry transparency), greater stability and
predictability of hotel cash flows) and too much money in the market causing
buyers to move up narrowing bid/ask spread. 39% of respondents believe
equity rates will be stable (remain the same)
10. Occupancy and ADR Fundamentals Hotel investors
appear bullish on revenue fundamentals with 78% predicting that average
occupancy levels will increase moderately in the next year. Furthermore,
64% of responders believe overall room rates will be up 1% to 5% over the
coming 12 months.
LIIC � The Lodging Industry Investment Council
www.liic.ws
Co-Chairmen