By Daniel Lesser
Barring any black swan event(s), the near-term outlook for lodging remains very positive. Domestic and foreign investment, and institutional capital continue to be deployed into single assets and portfolios of all types and locations of US hotels.
The second-longest recovery period in history endures, with a national unemployment rate at an 18-year low and robust consumer confidence across most sectors. As a result, the U.S. economy continues to exhibit very strong growth. Gross domestic product (GDP) is forecast to rise as much as 3% this year with relatively mild inflation. Thus far, interest rate increases by the Federal Reserve System have had little effect on commercial real estate lending. Rising debt costs have been somewhat negated by strong NOI growth, and the tremendous amounts of equity chasing yield creating downward pressure on underwriting returns.
It appears however that headwinds may be in the offing. The escalatory nature of America and China’s trade relationship represents a potential catalyst for upward pricing of fundamental risk. Furthermore, while the impact of the new tax code on the economy has yet to be realized, in the short-term GDP growth is anticipated to remain strong, placing upward pressure on inflation and interest rates. Additionally, during the recent past the yield curve, the difference between short-term and long-term bond rates, has flattened to a razor-thin margin. Many economists believe there exists a strong possibility that the curve will invert this year, creating an abnormal condition where long-term rates are lower than short-term rates, and one that has served in the past as a reliable indicator of an impending recession. Finally, with the current Presidential administration, domestic political turmoil appears unabated.
The LW Hospitality Advisors (LWHA) Q2 2018 Major US Hotel Sales Survey includes 44 single asset sale transactions over $10 million, none of which are part of a portfolio. These transactions totaled over $3.5 billion and included approximately 11,200 hotel rooms with an average sale price per room of $315,000. By comparison, the LWHA Q2 2017 Major US Hotel Sales Survey identified 39 transactions totaling roughly $2.8 billion including 11,600 hotel rooms with an average sale price per room of nearly $244,000.
Interesting observations from the LWHA Q2 2018 Major US Hotel Sales Survey include:
- With six major Q2 2018 hotel sales, California has been the most active transaction market followed by Florida and New York, each with six trades;
- The Chicago and Phoenix metropolitan areas are also active hotel sale transaction markets with three and four respective major Q2 2018 sales each.
- Eleven of the 44, or 25 percent of Q2 trades, were for greater than $100 million each;
- Seven of the Q2 trades were between $100 and $200 million;
- Two of the Q2 trades were between $200 and $300 million;
- The Margaritaville Resort Casino in Bossier City, LA sold for $376 million and the largest hotel sale transaction of Q2 was Blackstone Real Estate Advisors acquisition of The Arizona Biltmore in Phoenix for just over $400 million, or roughly $550,000 per room.
Encouraging and adverse trends currently occurring in the U.S. lodging industry include:
- During June, the national U.S. lodging industry achieved an overall increase in RevPAR for the 100th consecutive month, the longest period of successive growth on record, and the second longest growth period which lasted 112 months between December 1991 and March 2001;
- Despite rising gasoline prices, the American Automobile Association predicted a record 46.9 million Americans were expected to travel at least 50 miles over this year’s 4th of July holiday;
- “White hot” best describes the current debt markets, and while the volume of assets coming to market is rising, refinancing alternatives remain an attractive option for potential sellers; in fact, several savvy long-term holders of hotels have refinanced properties numerous times since the last economic recovery commenced;
- Supply growth in urban markets has plateaued and is now slowing, a phenomenon which during the near term, is anticipated to endure given rising costs of construction labor and building materials, and limited availability of construction financing;
- Strong corporate profit growth, which during the near term is anticipated to prevail;
- Foreign and attractively priced debt and equity capital, earmarked for investment in U.S. commercial real estate and particularly hotels, continues to be robust;
- Private equity capital raise volumes have increased to record levels, and much of this “dry powder” is earmarked for debt and equity investments in commercial real estate including lodging;
- Currently, the U.S. hotel real estate investment market is awash in capital, however limited buying opportunities exist as evidenced in part by the recent and continued bidding war for LaSalle Hotel Properties, the outcome of which is still anyone’s guess;
- Significant amounts of available traditional and non-traditional debt and equity capital in the market is placing negative pressure on underwritten returns;
- Although international travel and tourism are booming, competition from other destinations, and a strong U.S. dollar, are placing tremendous negative pressure on overseas arrivals to America;
- Rising hotel operational and ownership costs including: labor, renovation, utilities, and property taxes;
Barring any black swan event(s), the near-term outlook for lodging remains very positive. Domestic and foreign investment, and institutional capital continue to be deployed into single assets and portfolios of all types and locations of U.S. hotels. While the stars continue to remain aligned, and the fundamentals of the U.S. lodging industry are simultaneously favorable to buy, sell, refinance, and develop a variety of lodging product types, given a myriad of global and domestic issues that can develop into full blown calamities, short term future industry performance is fragile.