Full-Service Hotel Investment Up
A new survey recently released by PKF Hospitality Research last week said that investment in the hotel industry is thriving, fueled by continued increases in revenue per available room that are mitigating the risk of investment. PKF said that the hotel real estate investment market might be close to the peak of its cycle, spurring sellers to deal now in order to capitalize while prices are at their highest. Meanwhile, new investment is focusing on full, rather than limited, service hotels.
"The hotel industry has a good ride ahead of it," said Thomas Callahan, CEO of the western region of PKF. "For the next three to five years, everybody is looking at a very profitable period for the hotel industry. Right now, hotels are selling for premium prices, because interest rates are relatively low, capital is available and hotels as an asset class are looking to provide better returns."
More than 75 active hotel owners, equity investors and debt providers responded to PKF's 2006 Hospitality Investment Survey and the data detail the current seller's market in which investors are willing to pay substantial prices, prompting sellers to be more inclined to sell now. Lenders also are more apt to finance the transactions based on lowering default risks.
Although the survey indicated that the hotel industry had, perhaps, reached its peak in terms of strength, Scott Smith, vice president of PKF's Atlanta office, intimated that the peak would continue for at least a couple of more years. "We've reached the peak at the moment, but if we can sustain that peak for the next two years with slowly increasing interest rates, limited supply growth and continued growth of the economy, then hotel investments will provide a strong return relative to other types of real estate," Smith said.
Most investment is taking place in the full-service sector, especially in properties that are located in major cities. PKF noted that annual RevPAR in 52 of the largest U.S. markets was poised to rise 6.3 percent by year-end—the result of a 1.5 percent uptick in occupancy and a 4.7 percent increase in average daily rates. According to PKF, this level of RevPAR growth would translate into a 14.9 percent increase in profits for a typical U.S. property.
As supply continues to inch up, Smith said that investment risk is in the limited-service properties. With less construction barriers and quicker building time than full-service, limited-service properties will reach a saturation point faster, diluting the market.
"There's better long-term investment in full service than limited service," said Smith. "With full-service properties, the lag on development is longer—12 to 24 months—and in that time the existing full-service properties will continue to drive up occupancy and rates." Full-service properties also generate revenue from meetings business, but limited-service hotels do not.
According to Callahan, "Full-service is more attractive because of high construction costs and high land costs. There's going to be very few new, full-service hotels because of that. You've got a barrier strategy for that class and also strong income fundamentals—you put those things together and it's a good place in real estate to be."