The return of hotel transactions has taken longer than expected, but a splash of high-profile acquisitions and a potential wave of distressed assets coming to market have many believing the dam is about to burst.

Jones Lang LaSalle Hotels, which tracks asset sales of $10 million or more, reports more than $1.1 billion of hotel sales in the United States in September alone. By comparison, transactions totaled only $2.2 billion in all of 2009. Jones Lang LaSalle Hotels has boosted its 2010 forecast from the just surpassed $4.5 billion to $6.5 billion.

Several recent trophy sales in major markets indicate the paralysis of the past 18 months is over. But a schizophrenic climate has developed, as many distressed assets haven't come to market and some stabilized properties in secondary locations draw little interest.

That's changing, many analysts and brokers believe, as cash-paying real estate investment trusts (REITs) drive up prices in top markets, pushing investors and opportunistic buyers to secondary cities and select-service properties. Lenders and special servicers also have become more aggressive in selling notes and foreclosed properties.

“It took a couple recent transactions to get everyone's blood boiling,” says Bob Eaton, executive managing director of Colliers International Hotels, a lodging real estate investment advisory company. For Eaton, based in San Francisco, those transactions included the sale of the 201-room Hotel Monaco in San Francisco to LaSalle Hotel Properties for $68.5 million and Pebblebrook Hotel Trust's purchase of the 416-room Sir Francis Drake Hotel for $90 million.

“It's a feeding frenzy and a lot of buyers have dry powder in their guns ready to go,” he says.

LaSalle also closed on the 296-room Westin Philadelphia for $145 million and the 288-room Embassy Suites Philadelphia-Center City for $79 million. Also in September, Pebblebrook bought the 183-room Hotel Monaco in Washington, D.C. for $74 million.

REITs have accounted for 58% of all U.S. lodging acquisitions to date this year, most funded by cash. With debt constrained, private-equity firms needing leverage haven't been as active. “[REITs'] cost of capital is lower,” explains Joe Long, chief investment officer for Kimpton Hotels. “In effect, they've bid up prices.”

The average selling price per room has increased 86% to $107,988 this year, versus the 2009 year-end average of $58,190, according to Lodging Econometrics, the Portsmouth, N.H. hotel research firm. “We went from a market in 2009 largely paralyzed with buyers and lenders in workout situations, to the last six to eight months when the market in our sector — four-star hotels — has normalized very quickly,” says Long.

Trouble in California

Although the majority of assets bought by REITs weren't in distress, they could affect those that are. “Buyers are now looking at secondary markets because there's less competition,” says Alan Reay, president and founder of Atlas Hospitality Group, a hotel research and brokerage firm based in Irvine, Calif.

Reay estimates a third of the transactions and properties on the market in California are distressed. Eaton believes the number is closer to 50% in the U.S. And Al Calhoun, a managing director of Jones Lang LaSalle Hotels' select-service division, estimates 70% of what his company has on the market is distressed.

Reay's firm recently brokered sales of the Marriott Ontario (Calif.) for special servicer Helios AMC and the Mission Plaza in San Diego for LNR Partners. Jones Lang LaSalle Hotels and Irvine, Calif.-based Real Estate Disposition LLC combined to offer $420 million in primarily non-performing hotel notes and bank-owned real estate in an auction.

Calhoun recently solicited a call for offers on 10 hotels. The “secondary-type properties in mostly secondary locations” generated 20 offers, he says, noting that deals are recovering across categories.

Kimpton hopes to leverage $120 million in an equity fund into $250 million in deals and play white knight to save assets from distress. Atlas Hospitality Group's third-quarter Distressed California Hotel Survey reports that 529 hotels are in default or foreclosure.

But Reay estimates that 1,000 hotels operate under some form of forbearance agreement, a situation not unique to California. “If the lender doesn't sell the loans, the vast majority will cometo market.”