Investment activity in the hotel market is heating up—according to projections issued this spring by PricewaterhouseCoopers, PKF Consulting and HVS International—indicating enhanced quality for travelers and a potential rise in rates for travel buyers
(see story).The pace of initial public offerings and mergers and acquisitions in the lodging industry is expected to increase dramatically through 2004. Likewise, the number of hotel sales in the United States this year is projected to increase substantially over 2003. The year-over-year value of hotels on a per room basis also is expected to increase in 2004, to a greater degree than in any year since at least 1990.
Changes in ownership of either entire hotel companies or individual properties are a mixed blessing for travel buyers. On the one hand, new owners tend to invest more heavily in maintaining their assets, which benefits travelers. On the other hand, new owners are more eager to maximize the return on their investment, so buyers likely will see greater upward pressure on rates in markets that can support it.
The rebound in the economy, which has been accompanied by an increase in demand for hotel rooms, is behind the turnaround. Sellers are more confident they can get their price, while potential buyers believe they should commit before prices rise further. The picture already had started to brighten in 2003 when the average selling price of hotels, per room, rose 16 percent, compared with the prior year, according to the tracking firm Lodging Econometrics.
For 2004, PwC estimated that there will be between four and seven hotel company IPOs, the largest number of public offerings since 1996, when there were 12. Similarly, PwC forecast there will be between five and 10 major mergers or acquisitions before the year is over—the most activity since 1999, when there were 11 major transactions.
"Companies have been deferring transactions waiting for the equity markets to be more receptive, while the equity markets and institutional investors have been awaiting signs of accelerating industry performance," said Bjorn Hanson, head of PwC's hospitality and leisure practice.
Hoteliers Are HungryPKF also expects 2004 to be a banner year for transactions. Many hotel owners have waited up to three years for the market to turn around and now are eager to sell. "They're more motivated to dispose of underperforming assets and appear willing to meet buyer expectations," said Scott Smith, PKF vice president. "In many cases, they're anxious to redeploy capital either in other lodging products or other locations." Potential buyers are motivated as well. "Interest rates still are at an all-time low, so the cost of financing continues to decrease," he said.
Smith agreed with Hanson that the timing for a turnaround is right: "As market fundamentals continue to improve through 2004 and 2005, investor yields should continue to improve significantly," he said.
According to PKF, investors continue to favor full service hotels as opposed to the midprice, economy or budget segments. With higher barriers to entry for full service hotel development, investors see more of an upside to increased profits for this segment.
Stephen Rushmore, president of HVS, confirmed that opportunities for potential hotel buyers are excellent. "Values are heading up. Overbuilding will not be a significant risk for the next three to five years," he said. Hotel values in 2004 are expected to decline in only three U.S. markets. By contrast, year-over-year hotel values in 2001 declined in 44 markets as the industry downturn started to take hold. The downturn lasted through 2003, with hotel values declining in 33 markets in 2002 and 31 markets in 2003.
New York hotels remain the highest valued of any market in the country on a per room basis, even though 2003 values decreased significantly from the banner year of 2000. In 2003, a New York hotel room was valued at $207,000, compared with three years earlier when that room carried a $390,000 price tag. "By 2006, on the other hand, we expect that value to rebound to $444,000," Rushmore said. Underlying these values, the New York hotel inventory skews mostly toward full service properties, including many deluxe and upper upscale hotels, which tend to be the most expensive.
Nationwide, 119 single asset transactions occurred in 2003 that were valued at more than $10 million, a benchmark in hotel valuation. While this number compares favorably with 2002, when 110 such transactions were recorded, it is still well below the activity recorded between 1996 and 1998. In those three years, respectively, 227, 281 and 257 such transactions occurred.
Rushmore cited the 688-room Hotel del Coronado in Coronado, Calif., 837-room Hyatt Regency Maui and 305-room Lansdowne Conference Resort in Leesburg, Va., as the top high-profile hotel sales in 2003.