The capital markets environment for hospitality transactions continues to be unprecedented in its depth and strength. Nearly $60 billion in transactions occurred in 2007, the fourth consecutive year of such record-breaking sales volume.
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: