Hotel trades have seen a jump in activity this year thanks to some big-ticket deals — but sellers on the sidelines may be eyeing a more encouraging market, too.
Transactions through the end of July totaled $2.9 billion, according to STR, a hotel data and analytics firm. That’s up from $906 million the same 12 months earlier. While recent sales figures have seen a boost from large deals, the backdrop of the market has also become more positive, brokers and consultants said.
“Because buyers are more optimistic, then you’re going to get sellers come out and actually want to sell assets,” said Bradley Burwell, vice president of hotel brokerage and investment sales at CBRE.
One of the biggest investment sales was for the hotel under construction at 701 Seventh Avenue. Mark Siffin’s Maefield Development bought out partners — including Steve Witkoff, Michael Ashner’s Winthrop Realty Trust, Howard Lorber’s New Valley and the Carlton Group’s Howard Michaels — in a deal that valued the megaproject at $1.5 billion. Plans call for a 39-story tower containing a 452-key hotel, 76,000 square feet of retail and a 17,000-square-foot LED billboard sign.
The Plaza Hotel also traded hands, for $600 million, after three bidders struggled to nail down a deal with majority owner Subrata Roy’s Sahara Group. Katara Hospitality, a hotel-centric subsidiary of Qatar’s sovereign wealth fund, closed on the purchase July.
“These are big-ticket deals that we just didn’t see last year,” said Kyle Stein, managing director of hospitality, debt and equity at Prince Realty Advisors. But the hotel market does appear to have turned a corner, which may give urgency to sellers who have been seeking to offload underperforming assets.
In part, that’s because investors have grown less pessimistic about the broader hotel market. Real estate investment trusts, for example, faced a punishing sell-off in the beginning of this year, but shares have since been recovering. REITs, on average, tumbled roughly 13 percent. But, from the low point through the end of August, hotel REITs rose 20 percent.
The REIT slump, analysts said, was an overreaction, and the market has grown more confident as hotel operations have fared better than expected. When RevPAR, or revenue per available room — a central performance metric in the sector — was negative, buyers found it more difficult to underwrite future growth prospects, Burwell said.
“The operating trends of New York hotels are headed in the right direction a lot of faster than was anticipated,” he said. Last year, would-be sellers didn’t feel like they were being valued in line with New York’s historical trends, Burwell added.
RevPAR has increased 4.6 percent this year through August, according to STR. It was down 0.6 percent in the same period last year — and down 2.9 percent in the same period in 2016. At the same time, occupancy is up 1.4 percent this year and was flat in 2016.
Increasing room rates and continuing demand make hotels an attractive investment and could lure people off the sidelines, according to Michael Slattery, senior vice president at REBNY. AIG, for example, is hoping to offload an Embassy Suites by Hilton hotel in Midtown for more the $200 million. Two years ago, on the other hand, “it was pretty clear the market had kind of flattened,” Slattery said.
But while deals are getting done, sellers aren’t necessarily walking away with a profit. As a part of its ongoing liquidation, New York REIT earlier this year found a buyer for the Viceroy Hotel — but made a deal at a massive loss. Arden Group entered contract to acquire the hotel for $41 million, a far cry from the $148.5 million New York REIT paid for the leasehold in 2013. On a late 2017 earnings call then-CEO Wendy Silverstein said the company was seeing low offers for the hotel because of escalating ground lease payments and the cost of terminating the hotel manager.
In another deal, Westbrook Partners paid $165 million for the W New York Union Square, $20 million less than what its previous owner Host Hotels & Resorts paid in 2010. And, at the end of last year, Thor Equities closed on the purchase of the James New York hotel in Soho. The firm, in partnership with multiple high-net-worth investors, paid $66.3 million — down from the $70 million it initially went into contract for in August 2016, and 21 percent less than the $83.4 million PGIM Real Estate bought it for in 2013.
Further uncertainty remains — particularly the pipeline of supply coming into the market. The average daily hotel rooms available is slated to rise 3.6 percent this year and 6.4 percent in 2019, according to CBRE Hotels’ Americas Research.
Demand, too, is on the rise. But the looming new supply is among the factors keeping investors cautious, Stein said. With about 13,000 rooms in construction, according to STR, buyers and sellers will want to see that influx stabilize. Growing optimism will, in part, depend on how the market digests that supply, particularly in the absence of the flood of foreign buyers it once had.
There’s no longer that “suitcase full of cash,” Stein said. Those “without a gun to their head will probably want to wait and see a little longer.”