New York: Record prices being paid by investors for US hotels may be outpacing gains in room rates and stays as the slow economic recovery damps a lodging revival. Prices for lodging properties climbed to about $185,000 (Dh678,950) a room in the first quarter, according to research firm Real Capital Analytics Inc.
Values had peaked at $153,000 per room in 2006, then plunged 37 per cent to a low two years ago.
This year's jump is the result of a surge in luxury-hotel transactions and more purchases by real estate investment trusts, particularly in large cities.
While lodging occupancies and rates are climbing, the gains aren't enough to keep up with prices being paid for some full-service properties, said Rick Kleeman, managing partner at Wheelock Street Capital llc, a real estate investment firm in Greenwich, Connecticut.
"Asset prices on average have led fundamentals," said Kleeman, whose company bought the Courtyard San Diego Downtown and the Hyatt Westlake Plaza, both in California, this year.
"Obviously you have fundamentals improving, but clearly the economy is not picking up as fast as we had hoped. It's not the ‘06 or ‘07 crazy market but, on average, the market has run ahead of itself."
Rosy outlook
Occupancies in the Top 25 US markets climbed to 63 per cent in the first quarter from 60 per cent a year earlier, according to Smith Travel Research Inc. of Hendersonville, Tennessee. At hotels with the costliest rooms, stays rose to 67 per cent from 63 per cent.
In the 24 months following September 2008, when Lehman Brothers Holdings Inc. failed, contributing to the US recession, hotels fetched prices as much as 71 per cent higher than during the lodging industry's peak, according to New York based Real Capital.
The JW Marriott New Orleans sold in February of this year for $94.3 million, up from the $55 million price paid in January 2008. The Hilton Garden Inn Chelsea in New York City sold in September 2010 for $68.4 million, 24 per cent higher than its $55 million price in October 2007, Real Capital said.
Values have gained even outside major cities. The Holiday Inn in Oak Hill, West Virginia, sold for $3.5 million in July 2010, up 40 per cent from when it last sold, in September 2007.
"Pricing is pretty aggressive," Barry Sternlicht, founder of real estate investor Starwood Property Trust Inc, said in an interview at the New York University International Hospitality Industry Investment Conference in New York. "Even for generic hotels you get 20, 30 bids."
Daily room rates averaged $94.05 last year, and revenue per available room, an industry measure of occupancy and rate, was $42.40, according to Real Capital. That's "well below" the 2008 peaks of $106.65 and $54.42, said Ben Thypin, an analyst at the firm.
Hotel sales in the Americas are likely to jump as much as 25 per cent this year, Jones Lang LaSalle Inc's hotel investment services unit said.
Values have been driven up chiefly by demand from real estate investment trusts (Reit), which purchased $1.6 billion of hotels in the first quarter. That's 44 per cent of those traded and five times the total of Reit purchases in all of 2007, the peak year for hotel sales, Real Capital said.
Reits are focusing on full-service properties in large cities. Pebblebrook Hotel Trust agreed to buy stakes in six New York boutique hotels for $152 million, and earlier this year bought the Mondrian Los Angeles for $137 million and the W Hotel in Boston for $89.5 million. Pebblebrook planned to spend $400 million to $600 million on hotels during the balance of 2011, CEO Jon Bortz said in April.
Sunstone Hotel Investors Inc, the California based owner of 33 lodging properties across the US in March agreed to buy a majority stake in the Hilton San Diego Bayfront hotel, valuing it at $475 million.
The property, completed in December 2008, originally cost $350 million, according to its developer, Atlanta-based Portman Holdings LLC.
Sunstone acquired the hotel at a valuation of 13.4 times 2010 earnings before interest, taxes, depreciation and amortisation, "meaningfully below our corporate EBITDA multiple," Sunstone President Kenneth Cruse said in an e-mail.
"Our valuation of the hotel is a function of its in-place cash flows, protected location, future growth potential and competitive supply trends — all of which are very attractive," he said.
"If people are buying at par or a slight premium, they can justify a price with future growth," said Charles Pinkham III, vice-president of development at Portman.
That reasoning has contributed to hotel capitalisation rates, a measure of investment yield, falling to record lows of 4 per cent last year, according to Steve Rushmore, president and founder of HVS, a hospitality consulting firm.
He expects rates of 3 to 5 per cent in the luxury tier and 4 to 7 per cent for upper-upscale properties, the segment one level below luxury.
"Pricing even at midscale hotels is pretty aggressive at a 6 per cent cap rate," Sternlicht said.
