Investors and lenders in the lodging and hospitality industry have begun the New Year with a healthy dose of confidence following a 35 percent increase in U.S. deal volumes in 2013, and strong forward momentum globally and domestically.
Jones Lang LaSalle predicts global hotel transaction volumes will rise by 5 to ten percent to roughly $50 billion in 2014. The Americas should drive the increase with a 15 percent jump in 2014 through an abundance of equity and debt capital expected to surpass the 2013 five-year high of $24 billion. With an increase to $28 billion, according to Jones Lang LaSalle’s annual Hotel Investment Outlook report, this increase would mark the third-largest volume on record.
The report is a forward-looking, global analysis which tracks key factors affecting the hotel investment market. The driving factors influencing hotels investment in the Americas include:
- Private equity and REITs expected to comprise two-thirds of total hotel acquisitions volume in 2014
- U.S. transaction volumes growing in secondary markets
- Offshore investment in U.S. to increase by 50 percent to $3 billion in 2014 led by Middle East and Asian investors
- U.S. hotel fundamentals strong with 5 to 6 percent increase in 2014
“This is a good time to be a hotel investor and owner as we expect several more years of strong and growing fundamentals and 2014 will be yet another active year for hotel transactions,” said Arthur Adler, Americas CEO and Managing Director of Jones Lang LaSalle’s Hotels & Hospitality Group. “Our transactions forecast is based on key drivers of transaction volume: the availability and cost of equity and debt capital, industry fundamentals, the pricing and trending of hotel REIT share prices, and the composition of hotel ownership – skewing more towards traders rather than long-term holders. We are optimistic about the near- and long-term prospects for the industry.”
Urban Land Institute’s Emerging Trends in Real Estate 2014 report also cites the trajectory of the hotel sector is strong, noting “as travel increases the hospitality industry will continue to expand and benefit from the increased demand.”
Private Equity and REITs Racing to Place Capital in Hotels
The 35 percent increase in global transactions during 2013 can largely be credited to the amount of capital pursuing the sector with private equity funds leading the way. During the next several years these funds will have a buying capacity with leverage of up to $10 billion for hotel acquisitions. These investors will target single assets, large select service portfolios and mergers and acquisitions. Public REITs will join private equity and seek branded, institutional quality assets and small portfolios in core markets. These two investor groups should comprise as much as 65 percent of transaction activity.
Although private equity investors and REITs are leading the charge, capital flow is coming from a variety of investors. All-inclusive resorts in the Caribbean markets of the Dominican Republic, Jamaica, the Cayman Islands and Aruba continue to gain strength as stalled development projects receive financing and distressed resorts will received capital from opportunistic investors.
“We expect investors to seek a significant amount of financings and recapitalizations in 2014,” added Mathew Comfort, Managing Director of JLL’s Hotel Investment Banking platform. “Hotels will remain a targeted asset class for lenders as they can offer high yields relative to other real estate.”
Secondary Markets Shine
Properties in secondary markets saw a robust 2013, and will continue to lead the uptick in deals. “Secondary” includes widespread geographic location and asset types. Markets such as Atlanta, Houston and New Orleans are increasingly catching investor attention while resort property sales doubled over the prior year.
Activity is not limited to acquisitions: as hotel performance continues to strengthen in these markets, underwriting standards for these assets will loosen and sales volume should increase.
Offshore Investment to Rise by 50 percent
Middle Eastern and Asian investors will continue to set their sights on opportunities in U.S. primary markets such as Los Angeles, New York and San Francisco. Offshore investment in the U.S. is set to increase by 50 percent to $3 billion in 2014.
“Foreign investors are increasingly seeking hotels with strong fundamentals and secure cash flow in gateway markets,” said John Strauss, Managing Director of JLL’s Hotels & Hospitality Group. “Last year we saw several large transactions on the West Coast from Chinese investors and there will be more big moves from foreign capital sources this year.”
Although offshore investors largely target core assets in gateway markets, foreign buyers will seek resorts in 2014. As the economy strengthens and leisure travel picks up, resort transactions are expected to also gain momentum. For example, Mexico’s lodging market, in particular Cancun, Los Cabos and Mexico City, is showing signs of strong performance.
The hospitality industry is on strong footing, and the abundance of capital, a strengthening debt market and a wide range of available assets and interested investors will drive hotel market performance.
”Hotel fundamentals will continue to be driven by growing business and leisure travel in major gateway markets, as well as in secondary markets and resort destinations throughout the Americas,” added Adler. “Better fundamentals will result in increased occupancy and stronger pricing power. The United States is expected to experience RevPAR gains of five to six percent, creating opportunities for buyers and sellers alike in 2014.”
Jones Lang LaSalle’s Hotels & Hospitality Group’s annual Hotel Investment Outlook report will be broadly released in January 2013. To request a copy of the full report, please subscribe here:
Jones Lang LaSalle’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for luxury, upscale, select service and budget hotels; timeshare and fractional ownership properties; convention centers; mixed-use developments and other hospitality properties. The firm’s 300 dedicated hotel and hospitality experts partner with investors and owner/operators around the globe to support and shape investment strategies that deliver maximum value throughout the entire lifecycle of an asset. In the last five years, the team completed more transactions than any other hotels and hospitality real estate advisor in the world totaling nearly US $36 billion, while also completing approximately 4,000 advisory, valuation and asset management assignments. The group’s hotels and hospitality specialists provide independent and expert advice to clients, backed by industry-leading research.
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About Jones Lang LaSalle
Jones Lang LaSalle (NYSE: JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit www.joneslanglasalle.com