Despite Economic Turmoil, Hotel Deal Flow Should Continue

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The resilience of capitalism never ceases to amaze me. Just when the scary economic events of the last couple months seemed to spook some investors in the hotel industry, a new pool of money has arrived on the scene. A new report from Jones Lang LaSalle Hotels says while hotel transactions have slowed to a trickle in recent months, a number of factors will contribute to a slightly slower, but still steady pipeline of lodging deals in the coming months and into next year.

According to the firm, REITs spent more than $4.1 billion on hotel investments through August. Now, with their stock prices generally depressed many of these public firms have backed off from aggressive acquisition stances. But, says JLL, a slew of domestic and international private equity and institutional investors, many of which previously weren't willing to compete as aggressively for deals as did the REITs, are now ready to fill the void in the hotel marketplace.

One caveat: Like the REITs, the private equity players are most interested in high-quality, full-service assets, mostly in center cities or resort destinations. The investment thesis is these properties will be best able to ride any wave of rate inflation and rebound the quickest once the hotel and U.S. economies fully recover. Anther positive trend fueling investor interest is the lack of construction financing, which should keep new development in check for the next three years or longer. Even that dynamic has changed in recent months. Until the recent economic turmoil, some developers and even their bankers were beginning to think once again about constructing new hotels. That won't happen now, at least for the short term.

If I correctly remember my high school physics class, the theorem is “water seeks its level,” a scenario that's playing out in today's hotel acquisitions market. One player (REITs) pulls back from the market, only to be replaced by another (private equity). As I said, capitalism is a beautiful economic mechanism.

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