Dear reader, this is the most significant article I’ve posted in a long time. It’s longer than most articles I post here; please take time to read it. – Dave Hogg
Adapted by Dave Hogg from a May 14, 2015 article by Patrick Ford article in Hotel Management
In 2014, total investment in the United States lodging industry was an estimated $30.8 billion. Of the 1,292 hotels that were transacted, 935 reported a selling price into the public domain. The average selling price per room for those hotels was $156,002, up a dramatic 20.6 percent year-over-year.
The healthy increase in selling prices is due to record-setting hotel revenues and profits, low interest rates and the availability of attractive financing terms. Another part of the equation is that interest rates, although expected to rise, still remain attractive, causing competition to intensify for prized single assets and portfolios. Lodging Econometrics, a nationally respected hotel industry research firm, foresees selling prices continuing to accelerate for the next several years as hotel performance continues to shine in the absence of any significant new supply.
In 2014, a total of 1,292 hotel assets transacted or transferred ownership. Since the bottoming out in 2009 at 528 hotel transactions, total transaction volume over the past five years has ranged between 1,261 and 1,457 hotels. It is a narrow range far distant from the 3,218 transactions and transfers reported in 2007.
There were 799 single-asset transactions and another 481 hotels that changed ownership as part of a portfolio sale in 2014. A mere 12 hotels were recorded as part of merger activity. It is thought that any significant industrywide consolidation of companies and brands may still be at least another year away, after the expansion phase of the current real-estate cycle further accelerates.
BUYER AND SELLER ACTIVITY
For just the hotels that reported a selling price, investment totaled $22 billion. Equity funds were the most active investors in 2014, adding $7.4 billion in hotels, most of which were portfolio purchases. Publicly traded real-estate investment trusts were the next biggest acquirers. They invested $6.4 billion, primarily focusing on high-profile single assets divested by privately held hotel companies. Although on balance they were net sellers in 2014, privately held hotel companies were also significant buyers, investing $4.4 billion, mostly in single assets and smaller portfolios.
Publicly traded REITs were significant purchasers of large, high-profile, single-asset luxury and upper-upscale hotels that mostly come to the market during periods of high liquidity. The heavy demand for these assets from equity funds, REITs and privately held hotel companies caused a shift in the 2014 transaction mix. For the first time in this cycle, more than 50 percent of all hotel transactions occurred in the luxury, upper-upscale and upscale chain scales.
LE expects that transaction volume will intensify and selling prices will continue to soar through the expansion phase and into the early part of the maturity phase of the current cycle, probably peaking one to two years ahead of industry profitability.
With 3,645 projects and 460,551 guestrooms, the 2014 total construction pipeline stands at its highest level in six years. After a three-year bottoming formation, the pipeline now has posted five consecutive quarters of double-digit YOY growth. In both the third and fourth quarters of 2014, YOY increases were particularly impressive, exceeding 20 percent. Although the breakout might appear robust, pipeline totals are still a long way from the peak of 5,438 projects and 718,387 guestrooms set in 2007.
Projects under construction, the most important predictor of near-term supply growth, has catapulted forward to 1,086 projects and 136,442 guestrooms, the highest level in more than five years. The number of hotels under construction is up 37 percent by projects and 34 percent by rooms (YOY). Projects scheduled to start construction in the next 12 months have risen strongly to 1,351 projects and 160,061 guestrooms, up 17 percent and 13 percent YOY, respectively.
Project growth in the early planning stage is just beginning. The cyclical bottom for projects in early planning just occurred in the second quarter of 2014. But project totals bounced forward smartly in the second half of the year, adding 221 projects, and ended 2014 at 1,208 projects and 164,048 guestrooms.
Projects in early planning directly influence the number of hotels that will open three to five years outward. Projects that enter the pipeline in early planning are generally larger hotels in downtown or resort locations. Most are upscale select-service projects, while others are upper-upscale and luxury full-service hotels that are frequently part of mixed-use developments. Planning and permitting these larger, more complex projects is typically more protracted and also comes with longer construction periods. These projects generally open near the end of a real-estate cycle, often after the cycle has already peaked and begun to decline. Project counts in early planning are expected to spurt forward over the next two to three years and make significant additions to new supply toward the end of the decade.