Guest blog post written by Max Comess, Director, HFF Hotel Group.
In January, our team attended the Americas Lodging Investment Summit (ALIS) conference, one of the largest hotel investment conferences in the world, at the JW Marriott hotel in downtown Los Angeles. A reported 2,800 people registered for this year’s conference, just a fraction of the overall attendance that fills virtually every meeting room, restaurant table, and available nook at L.A. Live.
Abuzz with excitement, the tone was extremely positive, as everyone expected. Likely the most common catch phrase of the conference was “there’s plenty of runway left” in the current hotel investment cycle. Of course, we should note that this was the same catch phrase being used in 2006/07, and that none of the recent downturns resulted from running out of runway, but rather external shocks to the system that were basically unrelated to hotel fundamentals.
The market in general is performing very strongly with most markets and properties reporting records in terms of RevPAR and income. Many are saying that we are in the 8th inning of the cycle, although this perspective seems to vary widely from market to market. I would suggest we are in the late innings in markets like Manhattan and perhaps Miami Beach, while a market like Naples, Orlando, and Pinellas County (late cycle recovery due to group business, transient leisure, and incentive travel) is probably in the middle innings. Emerging U.S. markets, like Puerto Rico, are in the 2nd or 3rd inning, as are markets where there is considerable growth in latent demand (Austin and Nashville) or a re-urbanization occurring (Downtown Tampa, and Miami’s inland nodes like Midtown, Wynwood, Coconut Grove, and Dadeland). Many investors are just now beginning to look internationally, particularly in Latin America and the Caribbean (1st inning). So the real story of this year’s ALIS conference to me was the shifting and expansion of investors’ focus to find better returns in new and/or emerging markets. Bottom line, there is no shortage of capital for any type of transaction today; some just require looking a little harder than others.
Supply and new development were discussed in virtually every meeting. 2015 will be the year that products such as JV development equity and non-recourse construction financing come back into our vernacular without evoking nausea. In most markets, developers believe the supply-and-demand dynamic is favorable for new construction, with RevPAR rising and existing assets trading at or above replacement cost. On the flipside, we heard some pessimism regarding brand families flooding the market with new conceptual flags designed to spur development but perhaps also create competition with existing franchisees.
Institutional investors, for the most part, are widening their acquisition criteria as the market gets increasingly more competitive, and the supply of higher quality investment opportunities seems to narrow. Sure, everyone had lots of deals to talk about, but we frequently heard from top institutional investors that there were actually fewer “good” deals worthy of their time than in previous conferences. So once again, we have greater demand than supply for institutional hotel investment opportunities. To counter this, the top institutions are increasingly widening their appetite and looking for suburban locations and/or secondary markets. One of the top owners that we met with, who historically was only focused on the top 10 U.S. markets, is now expanding their focus to smaller markets where they own existing assets, in an attempt to find less competitive opportunities that are still synergistic with their broader portfolios. We expect this trend of expanding investment criteria to continue given where we are in the cycle.
The pool of investors and lenders is getting increasingly crowded and diverse. With a record amount of dry powder on the sidelines, there is a strong preference for bigger single asset deals and portfolios. We heard lots of groups tell us about their existing or anticipated need to invest as part of a 1031 exchange. We also had several meetings with representatives from international groups who historically have not attended ALIS. Asia and the Middle East is, without a doubt, the fastest growing and seemingly most aggressive source of capital for U.S. domestic hotel transactions. High profile deals, such as the sale of the Waldorf Astoria in New York City to China’s Anbang Insurance Group, is resonating in a big way in the East and creating a lot of interest among all types of Middle Eastern and Asian groups for U.S. hotels across the spectrum.
There is a clear desire from the market for more direct or “off market” opportunities, as well as an appetite for strong buyers to pre-empt formal sale processes with aggressive upfront offers. The acquisition teams that we spoke with seemed almost overwhelmed and were not shy in telling us to call them directly on potential listings. From a seller’s or existing owner’s perspective, we were approached by several groups who own properties within the competitive set of assets that we are currently marketing or recently closed. The clear message was:
“We don’t want to formally list our property, but please introduce us to your runners up so we can collectively manufacture an off-market deal.”
Fast-forward to today. I can honestly say that this has been one of the busiest two week periods that our team has experienced since 2007. ALIS not only saw a wave of new listings from our team, but increased the fervor of an already heated investor universe. We expect that 2015 will be full of fascinating deals, new and creative capital structures, new entrants to the debt and equity markets, and many new transaction and pricing records. As such, we are advising all of our hotel clients contemplating a near-term sale or financing to do so sooner rather than later or otherwise structure their investment to hold until the next cycle.