Hotel investors cool their heels

Hospitality sector’s strength creates new barriers of entry for NYC buyers

May.May 01, 2012 07:00 AM


From top: Extell Development’s Hyatt Times Square is slated to open in 2013; the Jumeirah Essex House, on Central Park South, is on the market.
Those who have invested in New York City hospitality in the last few years are likely sitting pretty with revenue per room, hotel occupancy and room rates all up. But with that improvement has come a higher barrier of entry for new investors.

As a result, analysts say, the enthusiasm to invest in hotels has cooled, as potential buyers recognize that the steepest performance gains may now be in the past.

“Last year people were buying, assuming that there was going to be more recovery coming into those numbers,” said Marc Magazine, managing director for hospitality at the global commercial real estate firm Savills.

Now, however, the velocity of hospitality transactions is lower than it was at the same time last year, Magazine said. In the first quarter of 2012, three hotels sold in Manhattan for a total of $338.4 million — a 51 percent decline in dollar volume over the first quarter of 2011, according to data from Real Capital Analytics. The average price per room has leveled off, too, at $402,355 — or 8 percent lower than 2011’s first-quarter average (although quarter-over-quarter comparisons can sometimes be skewed by one or two big sales).

Industry experts said the hotel market is now taking a breather, after a feverish recovery.

“There are probably fewer people chasing hospitality than there were a year ago,” John Wilcox, also a managing director at Savills, told The Real Deal.

However, Dan Fasulo, RCA’s managing director, noted that while sales are down from last year, the yearlong period ending in the first quarter of 2012 was at or close to boom-time levels of activity. Sales volume in Manhattan during that period was $3.6 billion — 85 percent higher than in the prior 12-month period.

There are now few bargains available for hotel buyers, he added.

“The days of 50 cents on the dollar or even less — they’re over in Manhattan,” he said. “You’re paying full price at this point.”

Then again, “Investors always complain about something,” he noted. “Half of them are still probably upset they didn’t buy in ’09.”

“Once-in-a-cycle”

The hotel industry plummeted in the immediate aftermath of the 2008 financial meltdown, bottoming in 2009. But it began recovering in early 2010.

“I think 2011 was very much a summation of the pent-up demand from the recession, and everyone had been building up their war chests,” said Bernard Schwartz, managing director of hotels and lodging assets at Steven Kamali Hospitality.

Today, revenue and room rates are climbing and occupancy is high, even as the number of hotel rooms in the city has grown steadily. Manhattan hotel occupancy rates jumped to 86.6 percent in 2011’s fourth quarter, up 3.7 percent from the same period of the previous year, according to data from PricewaterhouseCoopers. In 2012’s first quarter — traditionally a slower time of year — occupancy was 71.7 percent in Manhattan, according to the city’s Economic Development Corporation. That’s a 7 percent increase over the same period of the previous year.

Plus, the sustained high occupancy rate has allowed Manhattan hotels to increase their nightly room rates. Between 2010’s and 2011’s fourth quarter, according to PricewaterhouseCoopers, average daily rates rose by 2.4 percent to $315.73.

While that improvement is welcome news for investors who have already snapped up hotels, it’s created an additional barrier of entry for those thinking about jumping in now. The main problem for new investors is that those high rates are already factored into a hotel’s values, so the chances of even more gains are less likely.

In 2010 and 2011, hotel investors saw historically low capitalization rates, which measure the rate of return on a real estate investment, said Savills’s Wilcox.

In other words, buyers were willing to pay more money for properties with less income, betting that revenues would increase.

As an example, Wilcox pointed to the sale of the debt-plagued Union Square W Hotel. The property was auctioned off after its Dubai-based owner went into foreclosure. Despite the hotel’s problems, he said, “there were a lot of people who were looking at it and bidding on it, who were willing to accept that cap rate of a very low number because they liked the property and they believed it was going to improve.”

He added: “People were viewing it as a once-in-a-cycle opportunity to get this asset.”

Now, Wilcox said, sales volume is still high, but prices are “more normalized” because there is less expectation of growth.

Okay to overpay?

Despite the slight cool-down in new investment, hotel construction is expected to continue, with about a dozen properties scheduled to come online by the end of 2012, according to PricewaterhouseCoopers.

That includes seven properties in Lower Manhattan, with more than 900 rooms between them. Another two dozen are planned for 2013, including Extell Development’s 487-room Hyatt Times Square and the McSam Hotel Group’s Holiday Inn Manhattan Financial District at 99 Washington Street.

Moreover, the hotel investment sales market in New York is far stronger than elsewhere in the country. And, analysts do not expect big hotel sales — especially deals involving foreign buyers — to drop off in the next year.

Sean Hennessy, CEO at Lodging Advisors, a Manhattan-based industry consulting firm, said there are several properties that may soon hit the market in a bid to attract overseas investment.

In March, the Dubai Investment Group announced it was putting the 509-room Jumeirah Essex House, on Central Park South, up for sale. The Wall Street Journal reported that it could net a stunning $1 million per room.

Hennessy speculated that the Helmsley Park Lane Hotel could also hit the market. The hotel, also on Central Park South, was for sale in 2008, but never changed hands.

And last month, the New York Post reported that the Sahara Group, an Indian conglomerate, would pay $600 million for the Plaza Hotel — including $400 million for the building’s hotel component, or roughly $1.5 million per room. That, Kamali’s Schwartz noted, would be the highest per-key trade in New York’s history. Schwartz also pointed to the March sale of the Hotel Williamsburg to King & Grove Hotels for $33 million, or $520,000 per room, as another recent noteworthy acquisition.

At the moment, the number of hotels on the market in the city is down, Magazine said, in part because so many hotels have already changed hands in the last 18 months.

Still, he said, talk at a recent hotel-industry conference that he attended in Berlin was encouraging for New York City.

“Even if you overpay a little,” he said, “it’s regarded as a safe investment by international buyers.”


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