Hotel sales plummet on investor fears

The Scotsman Guide - Victor Whitman - 06 April 2017

Sales of significant hotel assets have been in a free fall. Although the market for commercial assets in most property categories has gotten off to a slow start compared to 2016, the decline in hotel sales has been more dramatic and started earlier.

Buyers have been jittery about the sector since the first half of last year, and their fears have only increased with rising interest rates and a growth spurt in hotel building, analysts say.  

Single-asset hotel sales were down by 33 percent year over year in February, to $1.2 billion, following year-over-year declines of 20 percent in January and 12 percent this past December, Real Capital Analytics reported. RCA tracks assets valued at $2.5 million and above.

The hotel sector was one of the first to recover from the downturn and saw big gains in room profits and occupancy levels for seven years through 2015. There also wasn’t a lot of building going on, so existing hotels did well. The room revenue and occupancy growth slowed in 2016 and is expected to deteriorate further through 2019.

Unlike other commercial asset classes that tended to see capitalization rates remain flat or fall, hotel cap rates shot up in the first half of 2016, suggesting that hotels were starting to be viewed by investors as more risky about a year ago, RCA reported.

Investors also have seen interest rates rise, and most analysts are projecting that existing hotels will see revenues weaken in the face of increased competition from new hotels. So, according to RCA’s analysis, investors want to see the prices of existing hotels come down.The result of this has been a sharp downturn in hotel-property sales, as sellers have been unwilling to make deals.

Occupancy, room revenues

Despite the rapid drop in sales, the occupancy levels and other key hotel market indicators remain strong. In 2016, the occupancy rate hit 65.5 percent nationally, an all-time high, according PKF Hospitality Research, a CBRE company.

“We are at a point in the cycle where we are sort of leveling off at the peak, and we think that we are going to be at the peak for an extended period of time at least for the near term,” said Robert Mandelbaum, PKF’s director of Research Information Services.

PKF analysts do believe the industry will be challenged to increase profits through 2019, as costs will increase. Barring another major economic downturn, revenue per available room, or RevPar, growth is expected to average just 1.7 percent to 3 percent annually, PKF estimated. Occupancy levels are expected to decline over the next few years and hit a low mark of 64.6 percent in 2020.

Hotels have already seen the annual growth in room revenues fall significantly. RevPar rose 3.2 percent in 2016, compared to an 8.2 percent gain in 2014. The annual daily rate (ADR) rose 3.1 percent, down from a recent high-water mark of 4.6 percent growth in 2014.    

Mandelbaum said hotel building has picked up in several cities. The supply of new hotel rooms, however, is not expected to far outpace the demand for rooms, as was the case in past booms. 

 “A lot of the new supply is coming in the middle of the two price ranges, what is called upscale and upper mid-scale, and that tends to be a lot of the popular hotels and brands,” Mandelbaum told Scotsman Guide News. “It is the select service brand. It is the boutique brand, lifestyle brand, extended stay hotels. These are the types of hotels that consumers appreciate and developers can afford to build, because they are not as costly as building a large convention or resort hotel, or a luxury hotel.”