Report: Unlimited Demand For Select-Service Hotels

A new survey finds that 41% of investors plan to buy select-service hotels over the next six months. But they might have trouble doing that as only 11% of respondents actually plan to sell during that period.

Jones Lang LaSalle Hotels’ first ever U.S. Select Service Hotel Investor Survey, which will be officially released next week, polled 6,000 select-service hotel owners and investors located throughout the nation. The survey findings reinforced the view that hotel investors are inundating broad swaths of the market with capital as hotel fundamentals continue to improve and debt financing options remain plentiful.

“In the last year, the lodging investment landscape has made the swing to a sellers’ market,” says Al Calhoun, managing director at Jones Lang LaSalle Hotels’ Select Service Division. “In addition to upward pressure on pricing, these factors have motivated the highest number of bids for select-service properties in more than a decade.”

Select-service hotels run the gamut from economy chains such as Econolodge and Motel 6 to mid-market properties like Hampton Inn, Hilton Garden Inn and Four Points. Jones Lang LaSalle also lumps extended stay hotels such as Homewood Suites into the select-service category. A full 48% of investors plan to buy mid-market select-service hotels over the next six months. It’s easy to see why, too: Mid-market hotels are cheaper to build than higher-end properties, and buyers can also achieve decent returns without making a huge upfront investment.

Demand is clearly outstripping supply. Select-service buyers outnumber sellers by a 4:1 ratio, reports the survey. One reason why offerings are so few is that new supply remains muted. Rising construction costs have made ground-up development less financially viable. The survey reflects this as only 18% of respondents plan to build select-service properties. Another piece of bad news for buyers: Nearly one third (31%) of respondents intend to hold their assets over the next 6 months, making it tougher for buyers to clinch deals.

“Very few investors are interested in new development given the costs of steel, land and concrete,” says Kristina Paider, senior vice president for research and marketing at Jones Lang LaSalle Hotels. “It’s very challenging to develop in this climate.”

Geography is also an important factor for many of the respondents. A full 57% of investors are eying select-service hotels in the Southeast for both acquisition and development deals. According to Jones Lang LaSalle Hotels, tax incentives combined with minimal union activity and lower labor costs are luring companies into this region.

After the Southeast, investors favor the Southwest and Mid-Atlantic regions for their employment growth and corporate relocations. In the Northwest and California regions, however, fewer investors are eying select-service properties. In fact, many select-service owners in these regions indicate that they will sell their properties over the next six months.

Another reason why demand to buy select-service hotels continues to climb may be cyclical. Research conducted by Jones Lang LaSalle Hotels finds that the select-service market trails the full service market by as much as 12 months. So many investors could be buying select-service assets assuming that the up-cycle will continue for several more years.

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