Hotel investors will spend upwards of $45.3 billion this year, projects Jones Lang LaSalle Hotels, which would make 2007 the fourth straight year of record sales volume.
But seismic shifts in the debt market have weakened demand for so-called “mega deals” among formerly aggressive private equity investors. The credit crunch has also injected some new realities into the formerly euphoric hotel investment market.
“Private equity firms’ impact on the hotel acquisitions arena, namely on sizeable transactions, has been greater than ever,” says Arthur Adler, managing director and CEO of the Americas unit at Jones Lang LaSalle Hotels. “[But] we do not expect to see the number or volume of mega deals in 2008 that were completed or announced during 2007.”
As Adler notes, private equity investors have aggressively pursued hotel deals. The single largest hotel privatization in history occurred in October when private equity firm Blackstone Group spent $26 billion to buy Hilton Hotels Corp. That deal relied on massive dollops of debt and the ability to swiftly execute a transaction.
But the rules have changed. The credit crunch has severely limited private equity firms’ access to capital. Lenders are no longer jumping at the chance to finance 90% of a deal’s acquisition price. Thus securing funding for multi-billion dollar transactions such as the Hilton deal is no longer that simple. Adler believes that some mega-deals will be hatched in 2008, though lenders will require “significantly more equity” than in the recent past.
“In addition, the debt markets will be more receptive to high quality assets with cash flow in place as well as superior sponsorship,” adds Adler.
Cash (and cash flow) will be king in 2008. As a result, Adler doesn’t expect the “buy and flip” business plan to hold up in this market. This tactic was used to great success by Blackstone Group earlier this year when it sold off roughly $14 billion of its freshly acquired Equity Office Properties Trust portfolio in weeks.
Lenders are far less interested in financing these massive property flips than they were earlier this year. That means that buyers will likely have to hold assets for longer periods of time. The same buyers will also be more reliant on the net operating income of their new portfolios.
So what about the hotel investors who bought significant assets or portfolios earlier this year? If their intention was to re-trade the assets at a higher price, Adler says they are likely sidelined now.
“Short-term traders or ‘flippers’ may take a view that they have not achieved their exit caps and therefore will choose to sell in 2008 at a modest gain rather than in five years,” he says.
If this scenario unfolds, Adler says that 2008 could bring “an abundance of single asset sales” as jittery investors unload hotel properties.Foreign capital may come to their rescue, too: Adler believes that the weak dollar, which few expect to strengthen in 2008, will fuel increased offshore investment into U.S. hotel deals.