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New Buying Audience Emerges as REITs Pull Back on the Throttle for Hotel Assets

Jones Lang LaSalle Hotels says sellers' window is still open as growth in
hotel room rates are expected to outpace inflation

Sept. 12, 2011 - Over the past eight weeks, the Standard & Poor's downgrade of United States long-term debt rating and disappointing economic data have led to stock market volatility and uncertainty among hotel investors. In its research report, FocusOn: Market Volatility Impact on Hotel Transactions, Jones Lang LaSalle Hotels provides an analysis of the hotel investment market that highlights the outlook for medium and long-term fundamentals which remains strong despite the current volatility. While the transaction market is likely to slow for the remainder of the year from the lofty first-half 2011 levels, the report highlights three of the top reasons why the transactions market will remain active: a growing investment interest from private equity investors, the continued attractiveness of assets with strong in-place cash flow or value-add opportunities, and an increasingly constricted supply pipeline.

Private equity emerges as new buying audience REITs spent more than $4.1 billion on hotel investments through August 2011 and have somewhat retreated from the acquisitions market due to declining stock prices and lower trading multiples. These shifts will even out the playing field between public and private investors.

"Sellers will face a new buying audience: a competitive bench of eager domestic and international private equity and institutional buyers. This new competition is a force that will ensure that values remain strong. Private equity and international players will become increasingly active in top U.S. markets," said Arthur Adler, Managing Director and CEO-Americas for Jones Lang LaSalle Hotels.

"There is no shortage of domestic and international equity capital for high quality hotel transactions as the market still seeks prime markets and product. The recent market disruption will provide an opening for opportunity funds, value-added funds, core-plus funds, and private international asset collectors to compete for top tier properties," added Robert J. Webster, Managing Director for Jones Lang LaSalle Hotels. "We have seen no falloff in investor interest for the marquis assignments that we are marketing at this time."

After being overshadowed by REITs in seven out of the past 12 months, private equity buyers accounted for the highest proportion of acquisitions in June and July 2011 on a running three-month average basis. In August, there was only a small gap between the weight of REIT and private equity acquisitions, further illustrating the trend that private equity buyers are set to be increasingly active.

Demand for strong cash-flow properties and value-added assets
Quality assets with existing yield are still well positioned to trade in the current market as economic concerns result in a "flight to quality." Since 2009, the market has demonstrated that the strongest hotel assets rebound most quickly, even during protracted economic declines. Owning high quality assets in key markets virtually ensures strong asset liquidity.

Since the beginning of 2010, the number of high quality, full service assets that traded in core downtown areas in key U.S. cities increased dramatically, cresting at 29 assets sold during the second quarter of 2011.

"While the pace of transactions of this caliber has softened slightly, investor interest remains high for full service assets. We have taken first and second round bids during this period of volatility and investor interest continues to be strong," said Adler.

Adler adds that value-added assets, which have not been highly sought after by the REIT market, remain highly desirable for private equity investors.

Another compelling reason why investors are targeting hotel assets is that these investments act as an inflation hedge. "Hotel ADR has grown at a higher pace annually than the consumer price index in 26 out of the past 38 years and the correlation in high inflationary times is extremely high. We expect hotel room rates to continue to grow above inflationary levels," Adler said.

Constricted supply pipeline Investors' uncertainty and the lack of construction financing is likely to further delay plans for new development, which represents a silver lining for existing owners and potential buyers. "The industry is undergoing an unprecedented dearth in supply growth as we will likely record only three years between 2002-2015 where annual supply growth was at or above the long term annual average. All of the other years during this period supply growth will be nowhere near the average. This is a phenomenon we haven't previously experienced and should result in a longer and more robust recovery during the mid and long term investment horizon," said Webster.

Investors are closely following hotel fundamentals and if short-term growth slows or stalls, buyers and sellers will naturally reset their value expectations despite the highly favorable mid and long-term market fundamentals. "Due to the high amount of equity-flush buyers, private equity investors' positioning to drive a new bidding and pricing market and low supply growth, the U.S. market for transactions will persist, even if at a slower pace than in the first half of 2011," said Adler. "There will be ongoing interest in the sector due to its long term attractiveness for investments."

About Jones Lang LaSalle Hotels
Jones Lang LaSalle Hotels, the first and leading global hotel investment services firm, is uniquely positioned to provide the depth and breadth of advice required by hotel investor and operator clients, through a robust and integrated local network. In 2010, Jones Lang LaSalle Hotels provided sale, purchase and financing advice on $4.1 billion worth of transactions globally. In addition, advisory and valuation services were provided on over 1,000 assignments. The global team comprises over 225 hotel specialists, operating from 39 offices in 20 countries. The firm's advice is supported by a dedicated global research team, which produced 70 publications in 2010 in addition to client research. Jones Lang LaSalle Hotels' services span the hospitality spectrum; from luxury single assets and large portfolios to select service and budget hotels, resorts and pubs. Services include investment sales, mergers and acquisitions, capital raising, valuation and appraisal, asset management, strategic planning, operator selection, management contract negotiation, consulting, industry research and project development services. Jones Lang LaSalle Hotels' clients have access to the resources of its parent company, Jones Lang LaSalle (NYSE: JLL).


Paige Steers
+1 312 228 2797

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