Let the Good Times Roll

This may be the best time to own a stabilized U.S. hotel property in five years. Fundamentals are improving fast, low interest rates continue to buoy the sales market, and the summer season — that operational windfall — is now here. This combination, plus a flurry of residential conversions that are thinning inventory, has transformed hotels into an incredibly lucrative property class.

“The good times will last for at least another couple of years, making it a great time to be a seller,” says Morris Lasky, CEO at hotel management concern Lodging Unlimited. The 50-year hotel veteran cautions that many “amateur” investors are pouring money into condo hotels in a trend that he finds troublesome. “This is begging a problem in the next few years, and we expect to see plenty of properties foreclosed,” says Lasky.

Regardless, the year kicked off on a strong note with national lodging occupancy hitting 58.4% at the end of the first quarter. That represented a 2.8% increase above its previous level just 12 months earlier, reports Smith Travel Research. Meanwhile, revenue per available room (RevPAR) increased by 7.2% over that period to hit $52.74.

That's a strong showing since the first three months of the year typically represent one of the weakest stretches for the hotel industry. One factor that may have helped: Easter fell in March this year versus April last year. With increased travel over the long Easter weekend, the activity may have bolstered first quarter lodging performance.

The supply side is equally as encouraging. There were approximately 100,000 new hotel rooms under construction at the end of March, says Smith Travel Research president Mark Lomanno.

“We anticipate room supply growth will remain relatively low and healthy demand growth will continue, leading to higher occupancy and good pricing leverage for 2005,” says Lomanno of the Hendersonville, Tenn.-based lodging research firm.

Indeed, more investors are buying and selling their properties. The total value of U.S. hotel properties that traded last year was nearly double the 2003 level. Jones Lang LaSalle Hotels reports a record $12.9 billion worth of U.S. hotels were sold in 2004, versus $6.7 billion in 2003.

Not only are hotel properties selling at a brisk clip, many of them are being targeted for residential conversion. In Manhattan, six of seven major hotel properties sold last year will be either fully or partially converted to residential use. This is largely a response to New York's ultra-hot residential sector, which has led the market for years. The Plaza Hotel, which sold for $675 million last year, is the most notable example of this trend. Israeli real estate firm El Ad Properties is converting the building's 805 rooms into 200 luxury condos.

Since September 2004, the number of Manhattan hotel rooms has declined by 0.3% (or roughly 56,000 rooms) based on Pricewaterhouse Coopers data. That would represent the largest decline in room supply in a decade.

“This is a great time to sell. The capital markets are extremely aggressive,” says Anthony Pierson, managing director of portfolio management at Cornerstone Real Estate Advisers LLC. “That alone should help keep the market liquid.”

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