Just how hot is the hotel sector? According to Real Capital Analytics, the volume of hotel deals in the U.S. more than doubled in 2005 to $22.3 billion up from $10.1 billion in 2004. One month into 2006, buyers are still chasing deals — including this week’s pricey $3.9 billion sale of the luxury Fairmont chain.
Expect more of the same — plus record prices — for the rest of the year. “This is the most active market I’ve seen in 20 years,” says Arthur De Haast, global CEO at Jones Lang LaSalle Hotels, who advises hotel investors: “If you see a good opportunity but don’t move fast, you simply will not get the property.”
The newly released Jones Lang LaSalle Hotel Investor Sentiment Survey (HISS), which polls the world’s largest investors and owners of hotel properties, indicates that there are 10 ready buyers for every seller in such sought-after markets as San Francisco, Chicago, New York and Washington, D.C. While 45% of investors say they intend to buy over the next six to 12 months — the highest figure since 2000 — only 11.3% of global respondents indicated a willingness to sell their hotels.
Where are the buyers hunting? “The Americas remain the favorite with investors,” says de Haast. He cites strong fundamentals, including improving occupancy and room rates. “A strong recovery is underway in most major markets across the Americas and, coupled with limits to new supply and solid economic prospects, investors are eager to buy into an improving market.”
The most impressive activity is in the luxury sector, where unprecedented prices are being paid. On Monday, luxury chain Fairmont Hotels & Resorts was sold for $3.9 billion in a deal that richly valued the Toronto-based chain — 16.4 times its projected 2006 EBITDA earnings before interest, taxes, depreciation and amortization, according to Bear Stearns analyst Joseph Greff. The average multiple for similar deals has been in the 12 times EBITDA range, he told investors in a Jan. 30 research note.
The joint venture that snapped up Fairmont consists of Saudi Prince Alwaleed bin Talal and private equity firm Colony Capital. Other bidders included an unnamed Canadian real estate fund and raider/investor Carl Icahn, whose $1.19 billion offer fell well short of the final price. Fairmont operates luxury hotels throughout the world, including Monaco, the U.S., Britain, Bermuda and Kenya. Greff predicts that the Fairmont deal will inspire a scramble for other luxury properties, pushing values up across the sector.
In some markets, however, there is no inventory for sale at any price. In New York City, where investors are already accepting 6.5% capitalization rates (the lowest in the world, according to JLL), sales are rare. Properties in Manhattan that might have traded hands are being converted to condominiums at such a rapid clip that the hotel room count on the island has fallen by 3,200 rooms over the past two years, according to PricewaterhouseCoopers.
“New York City hotel owners are famous for not selling. So many of these properties are owned by families, and many don’t need the money,” says Eric Anton, senior managing director at Manhattan-based investment sales brokerage Eastern Consolidated. “Plus, where will they put the proceeds?”
Hawaii, San Francisco and Washington, D.C. follow as the priciest North American markets with cap rates of 7%, 7.1% and 7.2%, respectively. The cheapest markets in the Americas, according to JLL, are Toronto, Montreal, Houston and Buenos Aires, with cap rates of 11.1%, 11%, 10.1% and 9.9%, respectively. All four markets suffer from low barriers to entry, supply concerns and questions about their stability.