The US lodging industry continues to enjoy the benefits of strong economic fundamentals as metrics on spending, global trade, and various manufacturing indices signal that America’s economy is poised for further growth. The US labor market continues to generate new jobs and further optimism is evident given the recently passed Tax Cuts and Jobs Act. US demand for leisure and business (transient, group meeting, and convention) travel accommodations has continued to rise with growth in demand outpacing supply through the first quarter of 2018. Demand for transient accommodations in several markets (such as Houston and South Florida) has been enhanced by continued natural disaster-induced demand and strong resort performance driven by in part by closures and devastation still evident in the Caribbean.
The LW Hospitality Advisors (LWHA) Q1 2018 Major U.S. Hotel Sales Survey includes 57 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled roughly $4.3 billion and included approximately 13,100 hotel rooms with an average sale price per room of $332,000. While the data speaks for itself, I feel it is important to note that the numbers are skewed by inclusion of the $1.3 billion trade ($4.3 million per room) of the Sands Casino Bethlehem, and the $95 million sale ($2.375 per room) of the Soho House Chicago. Net of the two trades (which include substantial revenue from non-rooms related sources) results in total Q1 2018 U.S. transaction volume of roughly $2.9 billion and approximately 12,700 hotel rooms with an average sale price per room of $231,000. By comparison, the LWHA Q1 2017 Major U.S. Hotel Sales Survey identified 54 transactions totaling roughly $3.6 billion including 13,200 hotel rooms with an average sale price per room of nearly $273,000. Eleven major Q1 2018 hotel sales occurred in Florida, followed by 7 in California, and 5 each in Maryland and New York.
Record low interest rates, though climbing recently, have continued to fuel a search for yield that is drawing capital into commercial real estate, particularly hotels, from other asset classes and global investor capital inflow to the U.S. However, there has been a dearth of new product for sale as vigorous debt markets offering stretch pricing and covenant light structures, provide existing sponsors refinancing opportunities and little motivation to transact a change of ownership. As interest rates increase, refinancing options become less attractive and current owners may seek to take advantage of current pricing to recycle assets.
During the past eight years, the relationship of U.S. hotel supply and demand has been favorable, though of late, the gap between demand and supply growth has narrowed considerably and while occupancy growth has slowed, higher average daily rates are anticipated to keep driving revenue per available room. Rising development costs coupled with constrained development financing and potential negative trade/tariff implications will raise the feasibility threshold for new hotel development.
Sector challenges include an acute amount of uncertainty, both international and domestic, which may exert negative pressure on the performance of the U.S. lodging industry. Moreover, negative sentiment related to traveling to and from the United States given the Trump administration’s stringent policies on immigration and tourism visas is detrimental to the sector. While an anticipated weakening of the U.S. dollar may lift inbound international travel, it would then have a negative impact on domestic consumer spending, forcing consumers to shift discretionary spending away from the lodging sector. Additionally, higher operating costs including labor and property taxes along with pockets of geopolitical instability and economic slowdown are likely to pose headwinds.
Finally, several notable U.S. portfolio mergers and acquisitions facilitated by sophisticated, experienced, long term hotel centric investors bodes well for the sector. Examples include:
Host Hotels & Resorts $1 billion ($703,000 per room) contract to purchase three significant Hyatt hotels, including: the 301 room Andaz Maui, the 668 room Grand Hyatt San Francisco, and the 454 room Hyatt Regency Coconut Point; Brookfield Asset Management $767.7 million acquisition of 107 WoodSpring Suites (former Value Place) properties; Choice Hotels International $231 million acquisition of the WoodSpring Suites brand and franchise business; Wyndham Hotel Group’s recent $170 million acquisition of AmericInn and soon to be acquired La Quinta Inns & Suites franchise and management businesses for $1.95 billion; RLH Corporation $27 million agreement to acquire the Knights Inn brand from Wyndham Hotel Group; Intense interest from numerous public lodging REITS and private equity firms to acquire LaSalle Hotel Properties (LHO)
The views expressed in this column are the author’s own and not that of ALM. Daniel Lesser is president and CEO of LW Hospitality Advisors LLC, based in New York City.