Fed Decisions To Impact Lodging

We\’ll get the bad news over now.

The Lodging Industry Investment Council’s annual member survey predicts a good-news-bad-news scenario for the market sector. Happily, the participants, who represent $20 billion in hotel investments, see the coming glass as more than half full. Not surprisingly, the bad news in the LIIC Top 10—the list of coming opportunities and challenges that the survey results produce—seems to come at the hands of our elected officials. The survey was compiled by LIIC co-chairman Mike Cahill, who’s also founder and CEO of Hospitality Real Estate Counselors.

Sequestration and ObamaCare are the twin engines of federally-imposed challenges, according to the survey’s respondents. In its report, LIIC states that the austerity policy is “anticipated to negatively impact hotel owners. Fifty-five percent believe that the current government sequestration will cause ADR to decrease 1% to 5% in markets that rely heavily on government spending.” While sequestration takes chunks from room rates, ObamaCare will be hiking labor costs. Some 86% of LIIC members say it will have that effect. Specifically, 48% of the membership see a significant—5% to 10%—jump in costs. Another 38% see costs going up only 1% to 5%.

But not all of the bad news can be laid at the doorstep of our elected officials. While there is a generally more positive attitude overall within members of the lodging-investment community, there are still some reasons why they, in the words of the report, “are getting refills on their Ambien and Xanax prescriptions.” These Rx-inducing issues are operating cost hikes; the sluggish economy (OK. The feds can take responsibility for this one, too); “Delusional seller pricing expectations; brand pressures due to PIP mandates and new hotel supply impact.” A whopping 90% of the respondents agree to seeing these clouds on the horizon. They also believe “the bloated Dow Jones Industrial Average)is predicted to remain below or near current levels as of May 1, 2014.”

And that’s where the bad news ends.

In keeping with the cautiously buoyant mood of the larger commercial real estate industry, the lodging sector is optimistic about the opportunities the near-term market offers. While there are some potential bumps in the road, the outlook for hotels of all stripes and in virtually all locales seems pretty promising.

Now at last for the good:

Expect “Significant Increases in property values. Nearly the full boatload . . . 98% of respondents . . . see this over the next year. According to 64%, this could be as much as 10%. “Value growth is anticipated to be greatest in the luxury/upper-upscale/upscale category,” the report reveals.

This should come as no surprise, but in 2014 transaction volume will also grow. Eighty-six percent of the respondents agreed, and 31% are “highly optimistic,” with visions of a 10% increase in activity dancing in their heads. “Additionally, 70% believe REIT (public and private companies) volume over the next 12 months will increase moderately to significantly,” the report concludes. (Only three members believe REIT volume will decrease.)

There is some concern that the return of development in some markets will hamper that predicted 2014 volume, but this is a double-edged sword. Development does mean growth, and more than two-thirds (72%) of the LIIC council believe it\’s a good time to develop assets, “as long as you are selective about the product and the market.” Only 23% would rather buy than build.

To quote the survey results, 67% “believe we are firmly implanted in the 4th to 6th inning of the current lodging investment cycle.” In other words, real estate is still cyclical and the only question is when values will peak. Roughly a third (31%) say 2015; 45% push it out an additional year; and 19% place their bets on 2017 at the earliest. Debt is a good bet, say the folks of LIIC, and 94% think availability will only get better over the next 12 months. Most of those (71%), however, think it will improve only slightly, while 24% see it getting “much better.” LTVs are expected to “increase, allowing for greater investment leverage,” says the report. The natural flip side of all of that is the decrease in all-cash deals, which LIIC reports is the lowest it’s been in five years.

Large coastal cities, also no surprise, were the preferred investment targets, says LIIC. What was a surprise was that College towns came in second. “As a real estate advisor,” says Cahill, “I guess a hotel located adjacent to a major university with views of the ocean in Los Angeles should be considered hotel brokerage Nirvana today.”

Finally, there’s an increasing fight for quality. This is because better-maintained and better-located assets are going up, according to 41% of the membership. But if the quality is there, the quantity isn’t and the same percentage says the for-sale inventory is “average.” In fact, 36% go even farther pinning the quantity to “below-average” levels. “In the next 12 months,” the report concludes, “sellers are anticipated to be 86% traditional equity owners transacting either off-market or through a broker. Where did the much heralded great lender/special servicer selling bonanza go?” That shipped sailed—quietly and in the dark of night—long ago.


Source: GlobeSt

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