U.S. Hotel Transactions Hot Market
April 9th, 2007
Private equity funds are fueling activity in the U.S. hotel transactions market, including for such well-known companies as Four Seasons and LaQuinta.
“The lingering question on investors’ minds is how to maximize yield in a capital-induced frenzy that continues in the face of lowered revenue growth expectations, increasing upward pressure on operating costs, and questionable exit expectations further out on the investment horizon,” said Scott Smith MAI, vice president in the Atlanta office of PKF Consulting, of the survey.
“Historically, market expansions abruptly concluded with recession and either war, catastrophic event, or both. With no clear signs of a recession brewing and considering the unpredictability of catastrophic events, the most likely reason why hotel ADRs and asset prices will come down is supply expansion,” said Smith, citing the 2007 “Hospitality Investment Survey” published by PKF Hospitality Research.
Despite fears of rising interest rates and Federal Reserve actions, the cost of financing continues to fall. The interest rate for hotel loans stands at less than 7 percent for the first time since the annual survey was started in 1988.
“In this kind of environment, where returns are highly dependent on operating revenues, investors need to carefully evaluate and selectively invest in those projects that promise adequate returns,” recommends Dr. John B. Corgel, PKF Hospitality Research senior advisor.
“If construction costs continue to grow at rates exceeding inflation and property value increases, it is reasonable to assume that existing hotels will be virtual money-printing machines over the next few years. Investors should have great difficulty matching the dividend return on hotels compared to other property types,” Corgel observed.
“On the other hand, should construction costs decline by 5 to 10 percent, the potential exists for the supply growth to exceed demand growth during the next two years,” he warned.