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Principal H. Keith Thompson highlights key developments during 2018

By: H. Keith Thompson, principal, Avison Young Hospitality Group

Thursday May 10, 2018

The last five months have been unusual for the hotel transaction market. Some of the hotel real estate investment trust (REIT) stocks began to compress in late January, resulting in fewer REIT purchases than the first five months of the same time period in recent years. This market change began after the ALIS hotel investor conference in late January, which is somewhat countercyclical, given there is usually an uptick in stocks after investment conferences. Clearly, market analysts heard news at the conference that caused concern, which led to pull back on hotel REIT valuations.

The Avison Young Hospitality Group believes a considerable amount of top tier product was priced late in 2017 for sale to public REITs. When REITs began to pull away from the transaction market, it caused a bid/ask spread to develop, resulting in fewer sales transactions to be consummated early this year, versus the same time period in recent years.

Over the past three weeks hotel REIT stocks have rebounded nicely, although many are still short of market pricing from six months ago. I do, however, expect the current pricing trend to bode well for hotel transactions in the second half of 2018.

Concern regarding public companies has caused debt to be more expensive today than six months ago and spreads have widened due to multiple concerns with EBITDA. We believe the impact of these changes over a five-year internal rate of return (IRR), will be mitigated by continued RevPAR increases provided those increases outpace the two to three percent annual cost creep to labor and taxes. Despite these factors, we are still in historically low debt cost territory relative to past market cycles.

Additionally, we are seeing heavy increases in hotels that are going into special servicing for a plethora of reasons, but it is still a concerning component given the public secondary debt market is vital to the overall financial health and function of the hotel transaction market. Should this trend continue, it may push the market more to on-balance sheet lending. We believe this could be the beginnings of the next down cycle.

Avison Young currently has more than $500 million worth of hotel transactions under sale agreement with 214 assets on the market. When asked, “why don’t you have all your engagements on your website,” the simple answer is that many of our assets are in portfolios and all sales of portfolios are private in nature and therefore not public knowledge. We just revised our website to better portray our public and private offerings. For more information, visit hospitality.avisonyoung.com.

About Avison Young

Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 2,400 real estate professionals in 79 offices providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial, multi-family and hospitality properties.

Contact: Mike Rieman

mrieman@cookerly.com / (404) 816-2037

About Avison Young Hospitality Group

Avison Young Hospitality Group is a national hotel practice group supported by 69 North American office locations and 2300 people. The firm currently has 214 hotels on the market totaling $3.4 billion in market value and for the past five years, the firm has been involved in one hotel transaction every five days. Avison Young Hospitality Group specializes in select-service and full-service hotels within the U.S. and works with CMBS lenders, whole loan banks, REITs, public companies, investment funds and private investors. The hospitality group can be found at www.avisonyoung.com under the “services” tab.

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