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Hotel Market: 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 summer--that operational windfall--is only weeks away. This combination, along with 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, chief executive officer 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,” adds Lasky.

Regardless, the year kicked off on a strong note with national lodging occupancy climbing to 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)--the combination of occupancy and average room rate--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 Lommano, and that is not considered a glut.

"We anticipate room supply growth will remain relatively low and healthy demand growth will continue, leading to higher occupancy and good pricing leverage for full year 2005," says Lommano of the Nashville, Tenn.-based lodging research firm.

Indeed, more investors are actively buying and selling their properties. The total value of U.S. hotel properties that traded last year was nearly double the 2003 level thanks to strong investor interest. Jones Lang LaSalle Hotels reports that 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 being sold, many of them are being targeted for residential conversion. In Manhattan, for example, 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 market, which has led the market for years and continues to lure capital. 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 trying to convert the landmark's 805 rooms into 200 luxury condominiums.

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. Among those hotels that are being converted into luxury condos are the Stanhope, Intercontinental and Regent Wall Street.

"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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