Investment Notes

The volume of U.S. hotel transactions dropped nearly 80 percent in 2008, yet it still exceed volumes realized from 2001 to 2003, according to a recent report from Jones Lang LaSalle Hotels. The firm says transaction volume this year will likely exceed 2008's dismal numbers as owners face more distress due to cash flow shortfalls or as loans reach maturity.

"As lenders increasingly take control of assets, they will sell some hotels as liquidity increases," says Arthur Adler, managing director and CEO-Americas for Jones Lang LaSalle Hotels. "Government intervention will likely cause loans to be written down, which will allow lenders to sell at current market values. Furthermore, investors will increasingly dispose of assets as the gap between sellers’ expectations and investors’ view of value narrows."

Last year, hotel transaction volume reached $8.5 billion, down from the record $45 billion achieved during 2007. Decreasing liquidity and deteriorating demand fundamentals caused transaction volumes to trail off as the year progressed, according to Jones Lang LaSalle. The first quarter of 2008 was the strongest, with transactions amounting to $3.2 billion before slowing to $684 million in the fourth quarter.

Portfolio deals marked the most dramatic decline, down 88 percent to $3.8 billion in 2008. Difficulty in obtaining financing also caused the average single-asset transaction size to decrease by 20 percent.

Private REITs were the largest buyer of hotel assets last year, with their investment in hotels increasing by one third, according to Tom Fisher, a managing director for Jones Lang LaSalle Hotels. Institutional investors and owner/operators were also among the more active buyers during 2008. Highly leveraged buyers moved to the sidelines in 2008.

"Private equity groups, having invested nearly $50 billion in U.S. hotel real estate from 2005 to 2007, were net sellers during 2008," Fisher says. "We do not expect them to re-emerge as active buyers in the near term until operating fundamentals stabilize and liquidity improves."

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