Savannah Duncan
During the past 12 months, sales of branded select-service, limited-service and economy hotels jumped 84 percent, according to Marcus & Millichap’s third-quarter hospitality research report. Southeast Real Estate Business spoke with Gregory LaBerge, national director of Marcus & Millichap’s National Hospitality Group, to find out why hotels are such a hot buy for investors.
Southeast Real Estate Business (SREB): Why has there been such a strong uptick in hotel sales?
Gregory LaBerge: In the market segment in which we operate — the $1 million to $10 million flagged, select-service, limited-service and economy hotels — there has been a significant rise in hospitality sales among private investors. One reason there has been such a big jump in sales of these properties is that we are coming off a period of very little activity. In the most recent round of reports, I tracked nearly 600 sales of these properties nationwide, compared with slightly more than 300 in the preceding period. In 2009, at the peak of the recession, there were fewer than 200 sales nationwide as financing dried up and property performance plummeted.
In addition, the hotel sector has been in recovery since 2010. Investors continue to seek opportunities to expand portfolios to take advantage of improving occupancy and average daily rates (ADRs) driven by both [limited] room supply and the demand for those rooms. In fact, year-to-date through May of this year, national room demand was tracked at its all-time peak of 430 million rooms sold. Moreover, investors are also active now because growth in room supply (i.e. new construction) is at a cyclical historical low. Indeed, expected supply increases through 2014 are projected to remain well below long-term historical averages. With regard to construction, the prevailing wisdom is that it’s less expensive in many markets to buy existing assets rather than build a new property.
The other factor that is juicing the recovery in hotel sales is greater access to SBA financing, primarily the 7A program. Acquisition funding from conventional sources has not come back as strongly, but agents at Marcus & Millichap tell me that some local and regional banks are gradually getting back in, primarily in instances where they have a longstanding relationship with the borrower.
Some interesting trends have also emerged in the institutional investor segment concerning assets that sell for more than $15 million. During the early part of this year, velocity increased 22 percent from the corresponding period in 2011, while dollar volume slipped about 36 percent to $5.5 billion. Approximately half as many branded luxury and upper-upscale properties sold in this year’s period, while sales of affiliated upscale and upper midscale assets jumped more than 60 percent.
The shift may reflect buyers’ perception that business travelers will continue to trade down from luxury and upper upscale brands to hotels with lower ADRs. The business traveler who had a generous budget before the recession and was able to stay at, for example, a Westin, now has a tighter budget and has to stay at a Hilton Garden Inn. The composition of the buyer pool may also be significantly different this year than one year ago. Many investors who purchased properties this year may not want the management intensiveness of luxury properties that usually have extensive meetings facilities, a spa and one or more restaurants. Upscale and upper-midscale properties are typically less demanding to manage due to their more modest guest amenities.
SREB: Is this a nationwide trend, or is it specific to certain cities or regions?
LaBerge: The recovery in property sales has occurred nationwide. In California, over the past year transaction velocity surged 2.5 times, more than doubled in the Northeast and doubled in the Southeast. The Midwest region posted a 63 percent increase in velocity, while activity in Texas rose more than 50 percent.
SREB: What was the median price for select service flags?
LaBerge: The median price was $57,200 per room in our latest national report compared with $62,300 in the prior 12 months. There is some distress still evident in pricing trends. Many new hotels came on line in 2008 just as the recession was taking hold, and many of the owners of those assets are not able to refinance and, thus, have to sell.
SREB: What kinds of hotels are most popular among investors?
LaBerge: Private investors are targeting strong select-service brands in the Hilton, Marriott and Intercontinental Hotel Group families built during the past five years. These properties, including Fairfield Inn, Hampton Inn and Holiday Inn Express, are generally performing well, partly reflecting their effective rewards programs for frequent guests and consistent system-wide service and property standards. Brands with less successful guest rewards programs tend to receive secondary consideration from investors.
SREB: What kinds of investors are buying hotels?
LaBerge: Our investment professionals are seeing small private investors that already own other hotel properties. Investors with prior experience operating other franchised businesses comprise potential new hotel investors.
SREB: What major hotel sales has Marcus & Millichap been involved in recently?
LaBerge: Earlier this year, Helen Zaver, senior associate of Marcus & Millichap in Atlanta, sold a 130-room Hilton Garden Inn in Birmingham, Alabama, for about $88,500 per key. This is a good example of a select-service transaction involving a property with strong brand affiliation despite a location in a secondary market. In September, we sold a 69-room Comfort Suites in Bastrop, Texas, in the Austin metropolitan statistical area for roughly $59,800 per key.
SREB: How do you anticipate the rest of the year will be for hotel sales?
LaBerge: The recovery in property operations has enabled more owners to sell, so I think we’ll continue to see strong activity in the fourth quarter, though the presidential election and fiscal cliff have added an element of uncertainty that will prompt different responses from property owners. On the one hand, if someone feels certain that lawmakers will do nothing to avert the fiscal cliff, they will be highly motivated to sell in the fourth quarter. If such concerns are not burdensome, there may be less incentive to execute a transaction in the near term.
SBA financing may be marginally more challenging to obtain in the months ahead, as many 7A lenders will fulfill their annual allotments to hospitality. It should be stressed, however, that there is still sufficient financing capacity available, especially as interest rates remain historically low.
— Gregory LaBerge is the national director of Marcus & Millichap’s National Hospitality Group (NHG) in Chicago. Contact him at gregory.laberge@marcusmillichap.com or (630) 570-2200.