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Hotel Sales Market Humming Along

The rush to buy hotel properties is not slowing down. As detailed in this month’s issue of National Real Estate Investor, demand for hotel assets is soaring. And, according to Jones Lang LaSalle’s annual Hotel Investor Sentiment Survey (HISS), released this morning, investors will not soon quench their thirst for investment grade hotels.

According to Jones Lang LaSalle Hotels, there are five buyers for every two sellers in the U.S. hotel market. And nearly half (or 45.9%) of all respondents want to buy assets in 21 of the 26 surveyed markets in North and South America. The survey polled the 2,000 largest hotel investors and owners in the world.

“Across the Americas, the low yield environment over the last two years has been sustained, with cap rates softening by a mere 10 basis points over the course of the last six months [up] to 8.5%,” says Arthur Adler, managing director and chief executive officer (Americas) for JLL Hotels.

To some investors at least, it seems that prices can’t climb much higher—even in the face of such strong demand. The HISS Survey found that 18.9% of polled investors, the highest level recorded in the survey’s six-year history, are looking to exploit capital appreciation by selling their assets. Their willingness to sell assets into this market could help drag sky-high pricing closer to the ground.

Kristina Paider, JLL Hotels’ senior vice president of research and marketing, says that this increase in seller sentiment has helped drive one of the most active sales seasons on record: Roughly $21.8 billion in U.S. hotel assets were sold during the first six months of this year. That half-year tally nearly matched the $21.0 billion in transactions recorded for all of 2005. What’s more, JLL Hotels anticipates that transaction volume for 2006 will exceed $30 billion—needless to say, a record volume.

Certain markets stand out. For example, more than half of respondents indicated a desire to buy hotels in Hawaii, Vancouver, California cities San Francisco and Los Angeles, Washington, D.C., New York and Chicago. Their interest in these markets hinges on the perception that coastal cities will yield strong performance over the next few years.

Why are these the hot spots? Vancouver, which is a new entrant to the top “buy” market in the survey, will host the 2010 Winter Olympics. On the opposite coast, New York City is poised to boost its already soaring occupancy rate in coming years; the city has been a net loser of hotel rooms, thanks to scant construction and condo conversions. One reason is a lack of new hotel rooms in the city, a trend that has also boosted the national hotel market in recent years. San Francisco and Washington, D.C. are likely to lure an increasing number of domestic and foreign tourists over the next few years, say hotel sources.

The only possible cloud on the horizon is accelerating construction (see earlier NREI story). Investors in the HISS Survey indicate greater intentions to develop new hotels since last year. New supply (as a % of inventory) is expected to grow by 1.6% and 2.6% during 2006 and 2007 respectively. Demand should hold firm with this new supply. Yet rising construction costs may keep a damper on new supply: Only 10.8% of polled investors intend to build new projects in 2007. This mixed assessment suggests that new supply won’t be a major problem for at least another three years.

The three markets expected to absorb the most new room supply in the near future are Buenos Aires, the Caribbean and Mexico City. Nearly 28% of respondents indicated a desire to build new hotel projects in the Argentinean capital, followed by 23.4% in the Caribbean and 21.2% in Mexico City.
“ New supply has really quelled due to high construction costs,” says Paider of JLL Hotels. “It’s still cheaper to buy versus develop hotels.”

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