Investors Expected to Check Into U.S. Hotel Properties In 2014
February 20th, 2014 by Alisa Sava
The hotel industry is one of the top prospective real estate markets of 2014,creating excellent opportunities for investors. Both business travel and flourishing tourism to the United States have stimulated the demand for hotel development.
Increasing demand, improving rental performance and supply of capital from REITs (Real Estate Investment Trusts) as well as private equity sources are believed to attract a strong flow of investment in hotel properties in 2014. According to a recent study by Jones Lang LaSalle’s Hotel Investment Outlook, there is a projected a global deal volume of $50 billion, a 5-10% rise on 2013 levels, marking a five-year high.
“This is a good time to be a hotel investor and owner as we expect several more years of strong and growing fundamentals,”says Arthur Adler, CEO-Anericas and Managing Director of Jones Lang LaSalle’s Hotels and Hospitality Group. “Hotel fundamentals will continue to be driven by growing business and leisure travel.”
Here are the predicted trends in hospitality sector:
- Investor confidence will support stable capital inflows
- Secondary markets will garner more interest as prime assets
- China is expected to be transformed into the largest overseas investor
- Debt financing will continue to improve and approach the highest levels since the downtown
- Limited- service hotels as well as mixed-use projects will gain more popularity
2014 Is a Great Time to Buy and Sell Hotels
Arthur Adler notes that the improving hotel operation fundamentals as well as the cost of equity and debt capital are the main factors that will support the hotel market this year. Better hotel fundamentals include increased occupancy and stronger pricing power. Thus, in the U.S. the average revenue per available room is expected to be $72,77, creating flourishing opportunities for both buyers and sellers.
Increasing foreign investment, competitive financing from CMBS (Commercial Mortgage-Backed Securities) and other debt sources will contribute to further development of hotel market as well as facilitate purchasing power and sale transactions.
Bellagio Hotel, Las Vegas, Nevada
According to PKF’s analysis, the demand and occupancy are forecasted to perform above average in the next few years, while the growth of supply will be below average. Currently, there are 320 hotels projects in the pipeline comparing with 293 in 2013.
“Travel and tourism to the United States continues to break new records, boosting our exports and helping strengthen our economy. The Obama administration has made promotion of travel and tourism a key priority of the economic growth agenda,” notes the US Secretary of Commerce Penny Pritzker.
More International Visitors Are Expected This Year
The biggest tourist influx is expected from China: approximately 10 million leisure tourists are projected to visit the USA in 2014. And with the average stay projected at a week, this creates a demand for an additional 70 million nights at hotels across the nation. According to the US Department of Commerce, the United States can expect four percent average annual growth in tourism with nearly 72 million international travelers projected to visit the U.S. in 2014.
China Will Be # 1 Foreign Investor to the US
China has become not only the main tourist source, but one of the major foreign investors in the U.S. hotel sector. The majority of current investment in U.S. real estate are made by the owners of EB-5 visas which allows them to obtain the right to receive green card – the United States lawful permanent residency. Thus, over the past three years, the Chinese have come to comprise 80% of the EB-5 visas to the U.S., and their visa applications have used the 10,000 maximum number of EB-5 visas available annually.
The Kiplinger Report predicts that China’s foreign investment will exceed $1 trillion globally over the next 10 years and the U.S. is a focus for the lion’s share of these investments. Thus, in 2013, the Greenland Holding Group, the Chinese high-profile property developer, bought a large site in downtown Los Angeles for $1 billion – the biggest deal for Chinese developers in the US to date. They plan to develop a mixed-use project comprising of office units, residence buildings and a hotel. Individual investments comprise the majority of all investments in the U.S. property market. However, today more and more institutional investors and large companies get involved in the direct investment game.
“Last year, we saw several large transactions on the West Coast from Chinese investors, and there will be more big moves from foreign capital sources this year,” notes John Strauss, managing director at Jones Lang LaSalle in Los Angeles.
Hotel Value Will Increase
In July 2013, Steve Rusmore, the founder of HVS, a global hospitality consulting organization, predicted that all hotel markets in the United States will show a price increase through 2016. Miami, Oahu, New York City, San Francisco and West Palm Beach will lead this race.
The predicted increase in hotel values will have a number of factors, urgency to invest now before the prices grow or to sell now when the market is hot. The price increase will also create development opportunities, as it has become cheaper to build a new hotel than to buy an existing one.
Limited-Service Hotels Gaining Popularity
The experts put Miami at the top of the list in terms of hotel development and investment prospects, then San Francisco along with New York and Houston. Limited-service hotels have become a hot commodity as investors consider them to be larger profit generators than full-service hotels. Low levels of staffing with limited offerings of services and amenities allow them to reach high revenues.
While the travelers preferring limited-service hotels are still in the minority, their ranks grew 55% from 2012 to 2013. According to the 2014 Emerging Trends survey, limited-service hotels’ development is expected to see a greater upside comparing to their full-service counterparts:
“High-quality limited service hotel brands where the interior design, look, touch, and feel tend to mimic full-service hotels will continue to proliferate.”
The best thing about the limited-service hotels is the cost-efficient buildings and easier maintenance.. The limited-service properties have a growing amount of competition and can also help develop a wider range of business connections. Some of the most successful limited-service hotels are Hampton Inn, Days Inn, and La Quinta. This boost is the result of economic recovery and travel increase:
“This recovery is likely to come in part from corporate travel – the bread and butter of the industry,” notes one hotel manager.
Mixed-Use Development Boom
The hotel mixed-use projects continue to expand. Usually they involved hotels with some residential property types, such as condominiums, condo hotel unites or single-family residences. Sometimes they also include shopping centers, office, entertainment, sport and other recreational facilities.
Hotel developers agree that today customers are looking for experience, not just a room: they want to live in a place where they can sleep, rest, work and go shopping. Golf has become an attractive amenity among the additional facilities.
“The strong influx of Chinese and other Asian investors is putting greater emphasis on having golf as a part of a project, and we believe these interests will drive golf course acquisitions and development in 2014 and beyond.”
As one of the top international real estate markets, the US provides favorable conditions for those who are eager to invest in hotel property. However, one of the main concerns about future of hotel real estate is that it is likely that the current growth will slow and the upside will be limited soon. The supply may come back quicker than demand and new hotels can really hurt high-performing markets. Rising interest costs and regulation is another cause for concern, as nobody is sure that the current trend will continue to grow. However, there is no sign of this happening in the near future:
“In an environment of an improving economy, there is more demand for offices, hotels, self-shortage. etc., so it will be an improvement in both volumes and pricing.”
The overall hotel fundamentals are expected to be strong and all indicators point to an increase in transactions, development, and investment in 2014. Savvy hotel investors and capital providers will continue to rely on experienced advisors to add optimum value to their properties and portfolios.
This year many investors will pay special attention to the limited-service hotels. This happens because the majority of customers want to receive a quality service for a reasonable price which, in turn, drives the hotel owners and developers to make adjustments in order to meet the expectations of the demanding market.
Watch JLL’s Hotel Investment Outlook 2014