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Transactions Still Trending

Deal Velocity Remains Strong Despite Shift In Hotel Fundamentals

Wednesday, November 30, 2016
Dennis Nessler
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The lodging industry has seen a fairly robust market in recent years in terms of transactions, and while overall industry fundamentals—particularly RevPAR growth—have weakened a bit during 2016 all indications are that deal velocity remains strong for the foreseeable future.

In fact, the gap between the bid and ask price among buyers and sellers has narrowed significantly of late, according to Jerry Swon, who heads Marcus & Millichap’s hospitality team in New York. “The market is still strong; we’re still seeing a lot of activity,” he said.

Swon’s group brokers deals for primarily select-service properties, generally in the $5 million to $15 million range, which are located in tertiary and secondary markets along the Northeast corridor.

He elaborated on the market shift he’s observed. “I’m seeing anywhere between a 50 to 150 basis point easing of cap rates. Obviously, it depends on the flag and it depends on the market, but in general terms what I was seeing a year ago that may have been trading anywhere between a 7 and 10 [capitalization rate] is now anywhere from 8 to 11 or even 12,” he said.

Swon attributed at least some of that shift to where the industry is in the current economic cycle, while adding he remains generally optimistic. “I think that everyone acknowledges that we have passed the peak. Something I continue to say is we could be primed up for an extended plateau period. With all the new supply that’s in the market that’s obviously going to impact RevPAR, so a lot of analysts’ forecasts have been adjusted down a little bit. However, I think the fundamentals in the sector should remain fairly strong,” he said.

Swon explained that part of the recent shift has created a more favorable market for buyers, which had not previously been the case. “I think sellers were holding on to lofty expectations, which typically happens in cycles. It takes a little bit of time for sellers to come back to the market and I think that is what we’re seeing right now. So we’re seeing bid/ask spreads tightening, which is good, and deals are still happening,” he said.

He further added, “pricing is still strong but it’s come off of its peak. I believe that the buyers are still there, but they have been a little quieter over the past 6 to 12 months. No one has wanted to be the guy to pay that exorbitant price.”

Swon noted that his team has closed roughly 40 million worth of hotel transactions in the last 90 days. Another factor contributing to deal activity, according to Swon, is brand-mandated PIPs [property improvement plans] coming due at the conclusion of franchise agreements.

He maintained that may be a function of the positive growth the industry has enjoyed over the last several years. “When the market is really hot the brands are holding all the cards, so to speak. They have the ability to put increased PIP demands on their owners,” he said.

Swon offered some specifics on what that can mean to an owner. “That PIP is running anywhere between two and two-and-a-half million dollars on a 100-key hotel. That’s a pretty big nut. If the owner doesn’t want to do that, they [the brand] can either find a new buyer or maybe they can find someone to develop into that market,” he said. Swon did later add of the PIP activity, “I think we’ll probably see that slowing a little bit,” he said.

Swon also pointed out that new construction financing is “slowing a little,” and as a result the pace of new inventory has slowed as well. As such, acquisitions represent the most likely avenue of growth for those owners looking to continue to invest in hospitality.

Conversely, Swon did acknowledge there are some owners who have been looking to divest properties figuring the market is headed in the wrong direction. “I do see some sellers who may have been trying to sell when it was the top of the market. No one knows when a down cycle is going to start, even though I don’t think this is any sort of drastic type of down cycle. I would consider it more of a correction. That being said some of these guys sitting on the sidelines may be trying to sell properties on their own. They may have had lofty expectations and now they either feel that the music has stopped or the music may be slowing down somewhat. This is the time for them to try to transact because it may become more difficult in the upcoming months and years,” he said.
Dennis Nessler    Dennis Nessler
Hotel Interactive®, Inc.
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