Investors bullish on hospitality industry

Dec.December 09, 2010 12:32 PM
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The year was 2008 and the nation was in a serious financial crisis. Very few financial institutions were interested in providing financing for any real estate class. If the subject was financing for a hotel, the lender might have made the following remark: “Do not pass go, do not collect $200 and make certain never to talk to me about financing a hotel.”

At the beginning of the year, I wrote an article entitled “Good riddance to 2009 for the U.S. hotel industry.” In it I quoted Mark Lomanno, the president of Smith Travel Research, when he said, “Good riddance to 2009, a year which we believe will go down as the worst in the modern hotel industry. The combination of a distressed economy in conjunction with panic pricing drove [revenue per available room, or revpar,] down to levels that were virtually incomprehensible just a year and a half ago. I look for a significant improvement in the key performance indicators in 2010.”

It looks like the significant improvements have taken place in the hospitality industry. STR reported that for the week ending Nov. 27, the U.S. hotel industry saw increases in all three performance metrics.

In the year-over-year comparisons, hotel occupancy increased 7 percent and the average daily rate went up 2.9 percent, while revenue per available room rose 10.1 percent.

STR reported that October, the latest month for which data was available, was a fantastic month for the U.S. hotel industry, posting increases in all three performance measurements.

Investors are keen on the hotel market.

“We are bullish on this market and are big buyers of hotels,” said Richard Mack, North American CEO at Area Property Partners, addressing the Real Estate Lenders Association Tuesday.

Earlier this month, Jones Lang LaSalle Hotels, the hotel investment services arm of Jones Lang LaSalle, released its bi-annual Hotel Investor Sentiment Survey, which reveals that 52 percent of investors say they will be assessing a “buy” strategy over the next six months.

Arthur Adler, managing director and CEO for the Americas for Jones Lang LaSalle Hotels, said, “After protracted dislocation and losses, transaction activity in the hotel real estate sector is remaining vigorous. Hotel markets are heating up across the Americas. Now that operating fundamentals have clearly turned the corner, buyers are becoming increasingly aggressive as they seek to establish a foothold at historically low purchase prices. Investors’ ‘buy’ sentiment is at its highest level in five years, evidencing respondents’ strong interest in pursuing acquisitions at the bottom of the cycle.”

Investors’ inventions to buy assets are highest in international gateway markets such as Boston (71.9% percent), New York (71.7 percent) Miami (69 percent) and Washington, D.C (61.1 percent) as these markets experienced the greatest rebound in hotel performance.

Helping to fuel the interest in hotels is the availability of financing from commercial lenders and mortgage real estate investment trusts.

“Debt liquidity both for acquisitions and refinancings is slowly increasing and exceptionally low base interest rates have created an attractive lending environment. Lenders are setting interest rate floors resulting in highly profitable spreads relative to base interest rates,” Adler added.

Money center banks, as well as private equity funds and mortgage real estate investment trusts, are actively pursuing financing of the hospitality market.

Last month, a major money center bank provided five-year fixed-rate financing at a rate of approximately 4 percent to a joint venture of a major educational endowment and a local hotel operator in the purchase of four business hotels in New Jersey. A number of banks including M & T, Capital One, Bank of America Merrill Lynch, Wells Fargo as well as foreign lenders have expressed interest in providing construction financing for limited service as well as four-star hotels in the tri-state market.

Looking at my crystal ball, the combination of strong fundamentals in all metrics of the industry coupled with the availability of financing makes me think that things look brighter for the hospitality industry.

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