U.S. Hotel Transaction Market Shows Signs of Life in Short to Medium Term
FocusOn The Return of Hotel Transactions Published by Jones Lang LaSalle Hotels
Chicago, June 13, 2002—The hotel transaction market is at last showing signs of life after almost nine months of inactivity, according to research from Jones Lang LaSalle Hotels. However, the first six months of 2002 have been sluggish, as the market warms to improved demand characteristics and a growing economy.
The industry is coming to realize that the market has hit bottom, which bodes well for both the operating and investment markets, said Melinda McKay, Senior Vice President of Jones Lang LaSalle Hotels, who authored the report. The transaction market is expected to rebound toward the end of 2002 and continue to gather momentum into 2003.
Why this bullish stance? As the economy and hotel market recovers, investors’ confidence in the medium to long term resiliency of the market will build. The absence of new supply will act as a stimulant, and trailing 12-month numbers will start to look more and more attractive. Pent-up demand will be liberated following almost a year of relative uncertainty and inactivity.
It is anticipated that transaction volume will reach almost six billion dollars in 2003, which would represent a peak in activity over the last five years. Average price per room is predicted to lift by around 25% over 2002 levels if, as envisioned, larger hotels are transacted.
Perception Is Not Reality When It Comes To Hotel Cap Rates
Hotel cap rates soared following September 11, albeit on a knee-jerk reaction. During Q4-01, hotel cap rates experienced a 70-basis point shift, significantly more than the 10-basis point shift for all property types. This increase placed hotel cap rates at one of their highest levels in a decade. Jones Lang LaSalle Hotels' transaction analysis indicated that hotels traded at an average cap rate of 11.5% in 2001, although the range was between sub-six percent up to 14 percent.
Based on our research and investor surveys, we expect cap rates in 2003 will be representative of historical numbers given the sentiment that the market has reached bottom and investors will be pricing upside moving forward, said Arthur Adler, Managing Director and CEO-Americas, of Jones Lang LaSalle Hotels.
As we travel through 2002, the capital markets continue to exhibit marked changes since the fall of 2001. The capital markets are responding to an improving economic climate, low interest rate environment and cautious recovery in the hotel sector as detailed below:
Characteristics of the Hotel Debt and Equity Markets
· Hotel lenders are becoming more aggressive as RevPAR recovery continues to improve.
· Private equity being selective and seeking high returns, but more realistic than that sought in Q4-01.
· First mortgage LTV ratios remain low (55% to 65%) but are improving.
· Focus on 24-hour urban markets, “drive-to” markets and high barrier to entry markets.
· Mezzanine financing raises LTV ratios to 70% to 80%.
· Institutional buyers – “wait and see,” but seeking more stable situations.
· Underwriting becoming somewhat more aggressive relative to post-9/11; however, standards are still evolving.
· Pent up demand for quality assets – pressure to put out money.
· Deals are being priced at spreads of between 225 to 300 basis points over LIBOR.
· Bid/ask spread is narrowing.
· Interest rates remain historically low.
· Budgets are viewed with skepticism. Must achieve monthly forecasts.
· Ability to secure terrorism insurance remains a key hurdle.
· Pricing remains varied – investors seeking stabilization.
· Abundance of mezzanine debt => all-in pricing becoming more aggressive => rates in the 12% to 14% range.
· “Value Added” mentality – repositioning / management availability.
· Investment funds focused on hotel real estate acquisitions are being formed.
Source: Jones Lang LaSalle Hotels
As we progress into 2003, investors will become more confident in underwriting the U.S. hotel sector and, given the pent-up investor demand, this will help create an environment ripe for a record volume of transactions. Yet, until hotel performance gathers momentum and investors have more transactions to benchmark against, pricing transactions will continue to be a challenge and as such valuation ranges will remain wide, concluded Adler.
Jones Lang LaSalle Hotels, the world’s leading hotel investment services group, provides clients with value-added investment opportunities and advice. In 2001, its success story includes the sale of 7,972 hotel rooms to the value of US$1.3 billion in 39 cities and advisory expertise on 100,550 rooms to the value of US$26.3 billion across 255 cities. Jones Lang LaSalle Hotels’ services include transactions, mergers and acquisitions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research. Jones Lang LaSalle (NYSE: JLL) is the world’s leading real estate services and investment management firm, operating across more than 100 key markets on five continents. www.joneslanglasallehotels.com
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