In the hotel real estate industry, few things matter more than the recovery of pricing and operating fundamentals.
So said brokers around the?U.S.?who were asked to qualify the current state of the industry as experiencing a recovery or not.
?Fundamentals have improved compared to what we saw from 2008 to 2011, but there has been no ?great recovery,? not to the extent we?ve seen in previous recoveries,? said?Brent Jaynes, managing partner, Leisure Real Estate Advisors, of?Prairie Village,?Kansas.
Ed James, principal of Mumford Co., had a slightly different view of the extent of the recovery when looking at the performance data: ?The single biggest measure of a recovery, for brokers, is the property-level operating results, and in short, they?re doing great. They?re recovering very nicely. ??For select service in midmarket and budget segments it has been very slowly, but consistently, recovering ever since the low of 2009.?
A closer look at hotel real estate factors still points to improvements.
People are willing to buy and sell hotels again, James said. ?Years ago, we were anticipating a ?tsunami of listings flooding the market,? which has not happened, but there has been a steady increase of listings.?
He said Mumford expects slightly more transactions in 2014 than 2013.
?It?s the beginning of the cycle for non-troubled assets,? James said. ?Operating results are at a point where things can sell at reasonable prices.?
Jaynes said the market is seeing more traditional sellers returning to the marketplace. ?The distressed mentality is not as severe as it was when the [real-estate owned assets] were the only thing out there, but we?ve gotten back to cash flow which is a novel idea.?
Pricing is showing a modest comeback, he added.
?While certain major market values may recover to 2007 price levels, I don?t see that happening anytime soon, with regards to the midmarket limited and select-service deals,? Jaynes said. ?Those pre-recessions values were inflated to begin with, especially in view of the depth of the recession that followed. Buyers are still too close to the ?recession? pain and they remain very price-conscience.?
Shift in underwriting
Eric Belfrage, first VP at CBRE in?Columbus,?Ohio, shared that the market is again willing to underwrite deals with a forward-looking analytical process, which is a departure from the trailing 12-month metric that recently has been relied upon.
?I come from an appraisal background, which is focused on buying the future,? he added. ?Value is composed of anticipation of future benefits. I can?t buy last year?s income.?
Belfrage said the forward-looking trend is allowing buyers to consider secondary and tertiary markets.
?Buyers that are out there are considering the?Midwest?who were not two years ago,? he said. He described a recent transaction, in Columbus, Ohio, in which a newer 100-room Hilton Garden Inn sale went ?smoothly.? He said the marketing effort was 45 days, 60 parties submitted confidentiality agreements, 11 made offers and it ended up transacting close to asking price.
?It?s starting to get fun again,? Belfrage said.
Jaynes offered similar sentiment on the return of the buyer.
?Buyers are definitely coming back out,? he said. ?We?re not sure whether they are tired of waiting, which I think is some of it, they?re tired of waiting to figure out what the government is going to do and waiting for the business climate to improve. They?ve been sitting for quite a while.?
The institutional buyers are beginning to look outside of gateway markets, as well, according to Belfrage, because the competition is too fierce.
The brokers agreed on the primary buyer profile in the current market: regional or smaller multiproperty owners.
James said small hotel operating and development companies are good buyers for what?s on the market: ?If they have existing properties nearby they may get economies of scale. They have local knowledge and local operations capacity.?
Challenges on deck
James said market sentiment has always been linked to potential changes in capital gains.
?Anytime there is sufficient belief that it will change and be less beneficial, it does tend to slow a recovery but that tends to come and go,? he said. ?Health-care reform down the road?that can make someone think twice about doing certain transactions?but we haven?t actually seen it yet.?
Jaynes offered a similar view.
?Taxes, per se, do not seem to be playing a major role right now, even though everyone I talk to believes that government is out of control/too large and tax rates are a reflection of the poor fiscal management throughout a bloated bureaucracy. In other words, business goes on in spite of the tax burdens and regulation.
?I do, however, hear significant concerns about the [Affordable Care Act] and its pending impact, especially on those larger companies with 50 or more employees.?