The worst is past. That’s the consensus of hotel experts who believe that the lodging sector hit bottom in the third or fourth quarter last year and has embarked on a modest, yet steady, recovery. The upturn is marked by rising occupancies and stabilizing room rates after a couple of years of free-fall.

Proof of the improving fundamentals became clear in late May when some 150 investors, sniffing impending upside in the marketplace, gathered in New York for a marathon 18-hour bidding session for the bankrupt Extended Stay Inc. chain of 680 properties.

The W Hollywood (CA)

A consortium that included Blackstone Group and Centerbridge Partners ultimately prevailed, paying a rich $3.93 billion in cash in a deal that would repay nearly all of Extended Stay’s $4.1 billion first mortgage.

The price was higher than the low value of $2.8 billion earlier put on the chain by Extended Stay advisors. The winning bid was bolstered by capital contributed by J.P. Morgan Chase & Co. and Deutsche Bank AG, quashing fears that U.S. banks would not be willing to invest in hotels this year.

There is an emerging confidence in the hotel sector this year that the Extended Stay acquisition only confirmed. Investment firm HEI Hotels & Resorts, based in Norwalk, CT, has purchased four assets since February and is hunting for more. The firm acquired a new W Hotel in Hollywood, the 202-room Le Meridien in Philadelphia, the 222-room Hotel Minneapolis and another Le Meridien in Dallas, using up about 25% of a $515 million investment fund.

“We consider this a very good time to buy. We expect to be active acquirers over the next 18 months,” declares Russell Urban, senior vice president of acquisitions and development at HEI. Urban predicts that bank lending to hotel investors will remain limited this year, but that won’t deter private-equity funds with their own capital and REITs that have raised money in public stock offerings from engineering cash-heavy deals.

“We’re well capitalized and can do all-equity deals if we have to,” says Urban. The big carrot, he adds, is valuations that have fallen to 40% of replacement cost in some cases.

Check out National Real Estate Investor for the rest of the story.

Check out National Real Estate Investor’s Ranking of the Top 25 Hotel Owners .