Markets to Watch and the Future of REITs

NEW YORK CITY-In the first two panel discussions at RealShare HOTELS 2011, talk turned to the effect of economic fundamentals on the growing sector, and where and when to buy. The event, produced by ALM's Real Estate Media Group and currently underway at the Hilton New York Hotel, has drawn over 200 attendees, as well as panelists with expert knowledge on the debt and equity sides of the hospitality industry.

“Despite the many uncertainties facing businesses and the economy today, hotel operators have done very well,” said Michael Desiato, VP and group publisher of ALM’s Real Estate Media Group, in opening remarks. The Real Estate Media Group produced the event. “It still offers a very compelling investment opportunity out there, so I think we have to stop talking about this double dip recession.”

The morning kicked off with “Economic Forecast: Markets on the Rise, Markets to Avoid, and Where It’s All Heading,” a discussion moderated by Geoffrey Davis, president of HREC Investment Advisors.

Jan Freitag, SVP, Global Development at STR, said that “there is very little supply growth” in sector, unless you’re focusing on New York, “which has supply growth through the roof.”

The second takeaway, Freitag said, is that there is strong occupancy growth because of the disparity between supply and demand growth. Year to date, according to Freitag’s data, rate growth is at 3.5%. “We’re surprised at how low that is.” For 2012, he projects supply growth at roughly 4%, and somewhat muted in New York City.

The ADR percent change for the nation “clocks in right now at 4.9%,” Freitag said. “That is a downward revision.” Freitag suspects operators don’t trust the data and are negotiating group rates into 2012 that they’ll later regret.

J.P. Ford, SVP at Lodging Econometrics, said that “New York clearly leads the way, followed by Washignton, DC,” as far as the supply pipeline for new projects is concerned. New York City, Ford said, has 111 and DC 104 ongoing projects. The two are followed by Houston, Philadelphia and Dallas.

With the ongoing focus on job growth, or the lack of it, Ross Woods, principal at Hotel Investment Strategies, shared a rather surprising theory. “We need to isolate and look at individual markets,” Woods said. “There are a number of markets throughout the country where there is no statistical relationship between employment growth and room nights of demand.” San Antonio, Baltimore and Philadelphia were examples Woods offered.

Projecting forward, Woods and panelist Ford disagreed about future GDP growth. “I believe that things will slow,” Woods offered. “Clearly employment is a major issue.”

While Ford sees some uncertainty on the national level, he was more optimistic. “I tend to err on the positive side,” he said. “I think that we are seeing some growth.”

Next up was the “Power Panel: Do REITs Rule the World?” Moderated by GlobeSt.com’s managing editor Ryan Clark, the panel looked at the future of this growing market--specifically questioning if the growth is sustainable.

“REITs took a beating a couple of years ago, then they came back,” Clark said. “Share prices are off from peaks in February. Are they still strong?”

“I would say certainly it’s been an interesting year,” said Jeff Dauray, VP of Acquisition at RLJ Lodging Trust. “With the lodging REIT equity prices where they are today, I don’t believe that the majority of REITs are buyers unless there is an adjustment in pricing that would allow them to acquire accretive investments.”

There is a disconnect between the pricing expectations of sellers and REIT buyers, Dauray said, that would need to shift in order for transactions to continue at the pace seen during the first half of the year.

James Luchars, principal at AEW Capital Management, said that he believes that REITs are merely taking a breather. “I think you’re seeing the results of REITs pulling back,” he says, citing repricing of the markets and conservative lenders. “In terms of where we are now and the impact, our view is that maybe this creates a window for us.”

As far as future opportunities for REITs, there was much agreement about where they exist: off-market and value-add transactions. “We're trying to look for off-market transactions,” Jack vanHartesvelt, managing director at A&M Capital Real Estate, told the crowd, referencing to potential of value-add situations as well. Value-add, he said, includes properties that can be renovated or rebranded. “Upper, upscale value-added is the focus. We buy where we think other people are going to want to own.”