Game Is on for Hotel Investors

DENVER-Strong fundamentals continue to make this a favorable time to invest in hotel properties, especially in the US. In comparison to Europe and some emerging markets, the U.S. economy is relatively healthy, with the strong growth in the stock market reflecting rising corporate profits and increased interest in deal-making.

While commercial real estate has yet to fully recover from the 2008 recession, the hospitality sector has demonstrated strength brought about by favorable operating conditions, limited supply growth and availability of private equity capital for debt restructurings or acquisitions.

Astute players can take advantage of properties, still under duress from the last cycle, that are unable to restructure debt or invest in required Property Improvement Plans mandated by the brands.

In the US, private equity funds invested $7 billion of capital for hotel acquisitions in 2012, a trend that is expected to continue, according to Jones Lang LaSalle's Hotel Investment Outlook 2013.

In addition, occupancy and RevPAR performance in 2013 remains strong, with significant potential for continued ADR growth in the coming years. Thus, growing RevPAR, limited supply of new product and a large pool of capital seeking favorable returns are making hospitality attractive relative to other property classes. Increasing CMBS debt activity should also complement this scenario, as long as we avoid excesses of the past with respect to over valuations and poor quality of debt.

It's important to remember that, no matter how good the deal, management rules. Flags in each segment, whether luxury, upscale, midscale or economy, are fighting a keen battle over brand differentiation. Add the impact of technology on all aspects of operations; everything from reservations to consumer-demanded infrastructure, and we have an environment where operations must be sharp. Operationally, one must deal with all of these complexities while still delivering the expected level of guest service. A deal might look good on paper but if operations are weak, value creation and asset appreciation will be limited.

Overall, we are at the point in the hotel cycle where there is significant potential for higher valuation. However, we must be mindful of private equity buyers or REITs over-heating the investment market, driving pricing to levels where expected returns are insufficient to compensate for the inherent risks of investing in hotels.

This is why, whether in US or elsewhere, properties must be evaluated on a case-by-case basis, paying close attention to location of the hotel, market specific demand, market competition, flag relationships, quality of existing and intended management, and equity/debt structure.

Aik Hong Tan serves as a principal of Greenwood Hospitality Group. The company, Greenwood Hospitality, is based in Denver and also has offices in Houston, TX; Harrisburg, PA; and South Windsor, CT. Aik Hong is based in the Denver office. The views expressed in this column are the author's own.