December 9, 2015 – As the U.S. economy enters its sixth year of expansion, and volatility heightens in the public equity markets, the chase for yield is intensifying and expanding the supply of U.S. focused capital. Despite increased caution and continued institutional market discipline, lodging fundamentals remain strong with few markets facing development driven supply issues and room rates well positioned for continued growth through at least 2016. With strong income appreciation and many investors pricing rising interest rate risk into underwriting, the U.S. lodging investment market remains well positioned to absorb controlled modest interest rate increases.
Overseas capital has become a major force in the U.S. hotel investment market as weak economic growth prospects in many international markets, as well as perceived relative stability and security in America, has resulted in a significant amount of foreign capital pursuing U.S. hotel assets. Although growth prospects in the sector have softened in the wake of global economic concerns and volatility, strong underlying fundamentals continue to buoy the U.S. lodging investment arena.
The LW Hospitality Advisors (LWHA) Q3 2015 Major US Hotel Sales Survey includes 49 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $2.1 billion, and included approximately 10,300 hotel rooms with an average sale price per room of $204,000. By comparison, the LWHA Q3 2014 Major US Hotel Sales Survey identified 42 transactions totaling roughly $3.9 billion including 11,000 hotel rooms with an average sale price per room of nearly $351,000. Comparing Q3 2015 with Q3 2014, the number of trades has increased by 17 percent while total volume has decreased by 46 percent. It is important to note that while the quarter over quarter 42 percent per room price decline appears dramatic, the Q3 2014 numbers were skewed due to inclusion of the $390 million trade or $1.9 million per room of the 210 room Park Hyatt New York. With 14 major hotel sales, California has been by far the most active transaction market followed by Florida with 6 major hotel sales.
U.S. lodging supply and demand trends have been favorable for the last five-plus years. As investors adopt latter cycle strategies, there is now heightened focus on supply, which has been increasing year over year since the recovery started. Demand, although still positive from a long-term historical perspective, has been decelerating for the past four quarters. While the majority of U.S. hotel market participants are still optimistic about 2016 industry fundamentals, at this juncture there is concern that results will not be as robust as 2015. Following an active first half of 2015, U.S. hotel transactions slowed in the second half of the year as, among other factors, lower REIT share prices put upward pressure on the cost of capital essentially slowing many REITS’ appetite for hotel investment.
While uncertainties in the lodging industry clearly exist, the outlook can be summed up as cautiously optimistic with a wait and see environment until at least year end. The discrepancy between public and private market valuations remains wide, which is anticipated to lead to increased lodging M&A activity. Furthermore, rapid growth of alternative lodging accommodations, specifically Airbnb as well as a consolidation of travel distribution channels such as Expedia Inc.’s acquisition of Travelocity, Orbitz Worldwide, and Homeaway, Inc. are placing tremendous pressure on hospitality platforms to swiftly expand their brand offerings and footprint. Recent noteworthy lodging transactions include: Interval Leisure Group Inc. $1.5 billion acquisition of Vistana Signature Experiences, Blackstone’s $3.93 billion acquisition of Strategic Hotels & Resorts Inc., and the recently announced blockbuster $12.2 billion acquisition of Starwood Hotels & Resorts Worldwide Inc. by Marriott International. Within the lodging industry, bigger is clearly better and additional sector combinations will occur in 2016.