During the past several years, buyers have been eagerly looking for lodging assets in which to invest and have been acquiring hotel properties through whatever means were available: single-asset purchases, portfolios, as well as through mergers and acquisitions. Hospitality transaction momentum across the nation surpassed the records achieved in 2005 and 2006 in both volume and pricing. The first half of 2007 was characterized by ample availability of capital earmarked for hotel investments and private equity firms took full advantage, which resulted in enormous numbers of large portfolio transactions. Even in this current unstable period in the capital markets, hospitality pricing has remained surprisingly strong, evidenced by record-breaking prices coupled with low cap rates, albeit at a slowly increasing rate.

Currently, US capital markets are experiencing skittishness and a sense of uncertainty about the future. Some economists believe the US is about to enter an economic recession, others believe we are already experiencing the effects of negative real economic growth. Either way, the fundamentals for the US lodging industry remain positive and the outlook is for continued growth, albeit at declining levels. During the next several years, while the national hotel occupancy level is anticipated to remain relatively flat at roughly 63%, average room rates are expected to grow at roughly twice the rate of inflation.

Several drivers support my belief that the US hotel industry will continue to achieve increased revenues and profits during the foreseeable future. Nationally, net room-supply growth continues to occur at historically low levels. Urban, full-service hotel development levels remain low as the majority of construction activity is concentrated in limited-service, suburban locations. Demand for US hotel rooms continues at record levels, and while growth is diminishing, that occurs off very high bases. Overseas demand for US lodging accommodations will continue being robust as a result of a weak dollar that entices foreigners in record numbers.

On the capital stack side of the hotel investment equation, spreads on loans have clearly widened and loan-to-value ratios have declined, resulting in a more challenging debt environment in which to obtain new, or refinance old debt. That is the bad news; the good news is that construction financing for new hotel product is also more difficult to obtain than during the recent past, a phenomenon that will constrain all types of new hotel development.

The CB Richard Ellis Valuation & Advisory Services Hospitality & Gaming Group continuously monitors the major US hotel sale transaction market. The CB Richard Ellis 2007 Major US Hotel Sales survey includes 112 single-asset sale transactions above $10 million each that did not trade as part of a portfolio. These transactions, which total almost $8 billion in trades, include roughly 36,400 hotel rooms with an average sale price per room of $219,000.

Interesting observations relative to the CB Richard Ellis 2007 Major US Hotel Sales survey include:

The majority of single-asset hotel trades of $10 million or more continue to occur along both US coasts.
Major urban 24/7 markets such as Boston, Chicago, Los Angeles, New York and San Francisco will remain the focus of interest to hotel investors due in part to high land and construction costs which create significant barriers to entry for new product.
Recent rapid appreciation of US hotel assets is clearly demonstrated by three 2007 transactions, namely the $136-million trade of the Washington Marriott in Washington, DC, which was previously acquired 14 months earlier for $90 million; Campton Place in San Francisco, which was recently acquired for $58 million by Taj Hotels Resorts & Palaces and previously sold for $44 million 18 months prior; and the 376-room Laguna Cliffs Marriott Resort & Spa which recently traded at $200 million, approximately 2.5 times its $82.4-million prior sale in 2004.
20 (18%) of the major single-asset US hotel sale transactions of $10 million or more traded in excess of $100 million each.
Almost one third of the single-asset US hotel trades of $10 million or more that occurred during 2007 were of properties that do not have an international "brand" affiliation.
Four "supertanker" (greater than 1,000 rooms) US convention-oriented hotel trades occurred during 2007, namely the Anaheim Hilton, Anaheim, CA (1,572 rooms), Hilton Atlanta & Towers, Atlanta, GA (1,226 rooms), Hyatt Regency New Orleans (1,184 rooms) and Hilton Washington, Washington DC (1,119 rooms).
Overseas hotel companies continue to expand their global footprint and distribution channels by selectively acquiring major hotel assets in US gateway cities. Examples include: Taj Hotels Resorts & Palace's recent $58-million purchase of Campton Place in San Francisco ($527,000 per room); Barcelona-based Hotusa Group and Losan Hotels World's $78-million acquisition of the Dylan Hotel in New York ($729,000 per room); and Hong Kong-based Great Eagle Holdings $170-million buy of the Ritz-Carlton Huntington Hotel & Spa as part of its plan to expand its global hotel business through its wholly owned subsidiary Langham Hotels International ($434,000 per room).
In addition to being the most prolific acquirer of hotel corporate enterprises, the Blackstone Group was also the most active seller of major single US hotel assets with seven such dispositions during 2007.

Due to recent credit market constraints, the national hotel transaction environment has become less frenzied. Sophisticated, long-term investors that remain focused on US hotel markets ("smart money") perceive a current pause in the action relative to the dramatic, recent rise in lodging asset values. The outlook for the sector is to continue posting rising profits due in part to pricing power of US hotel rooms that still rests on the side of hotel owners/operators. Those who understand the unique aspects of the space will identify opportunities to acquire US hotel assets at below replacement cost levels.

Furthermore, the velocity of overseas capital from all parts of the globe seeking opportunities in US continues to rise. US lodging investments offer demonstrably attractive risk-reward relationships, are relatively inexpensive, and provide superior risk-adjusted returns that are difficult to achieve elsewhere.

Daniel Lesser is senior managing director-industry leader, valuation & advisory services-hospitality & gaming group of CB Richard Ellis in New York City. The views expressed in this article are the author's own.

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'07: One for the Record Books

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