The return of the hotel transaction market has taken longer than expected, but a splash of high-profile acquisitions and a potential wave of distressed assets coming to market have many believing the dam is about to burst.

Kimpton Hotels sold the 201-room Hotel Monaco in San Francisco to LaSalle Hotel Properties for $68.5 million earlier this year, helping set off a feeding frenzy of activity among trophy assets in major markets.

Jones Lang LaSalle Hotels, which tracks asset sales $10 million and higher, reports more than $1.1 billion of hotel sales in the United States in September alone. To put that figure in perspective, consider there was only $2.2 billion transacted in all of 2009. Given that the velocity of transactions is accelerating, Jones Lang LaSalle Hotels has boosted its 2010 forecast from the just surpassed $4.5 billion to $6.5 billion.

The buying opportunity of a lifetime many expected has not arrived, but several recent trophy assets acquired in major markets for top dollar indicate the paralysis of the past 18 months is over. A schizophrenic climate has developed, though, as many distressed assets haven’t come to market and some stabilized properties in secondary locations have drawn little interest from buyers.

Many analysts and brokers around the industry believe that is changing as all-cash-paying real estate investment trusts (REITs) drive up prices in top markets, pushing investors and opportunistic buyers to secondary cities and select-service properties.

Seeing improved operating results, forecasts and rising sales prices, lenders and special servicers have become more aggressive in selling notes and foreclosed properties. Owners not in distress also are looking to cash in, while others whose properties are headed toward default are trying to get out while they can.

Buying power
“It took a couple recent transactions to get everyone’s blood boiling,” says Bob Eaton, executive managing director of Colliers International Hotels, a lodging real estate investment advisory company.

For Eaton, who is based in San Francisco, those trend-setting transactions included the purchase of the 201-room Hotel Monaco in San Francisco by LaSalle Hotel Properties for $68.5 million and Pebblebrook Hotel Trust’s purchase of the nearby 416-room Sir Francis Drake Hotel for $90 million.

“That’s a real ringing endorsement for San Francisco,” he says. “There were no transactions, no values and now all these people are shopping their hotels. It’s a feeding frenzy and a lot of buyers have dry powder in the guns ready to go.”

It wasn’t just in San Francisco, as LaSalle also closed on the 296-room Westin Philadelphia for $145 million and the 288-room Embassy Suites Philadelphia-Center City for $79 million. Also in September, Pebblebrook bought the 183-room Hotel Monaco in Washington, D.C. for $74 million and the 140-room Grand Hotel Minneapolis for $33 million.

REITs have accounted for 58% of all U.S. lodging acquisitions to date this year, most funded by all cash. With debt constrained, private-equity firms needing leverage haven’t been as active. “[REITs’] cost of capital is lower,” explains Joe Long, chief investment officer for Kimpton Hotels. “In effect, they’ve bid up prices.”

The average selling price per room has increased 86% to $107,988 this year, compared with the 2009 year-end average of $58,190, according to Lodging Econometrics, the Portsmouth, N.H. hotel research firm. This year’s average isn’t far from the peak of $119,553 reached in 2007.

That uptick explains why Kimpton has been both a buyer and seller. Since January of 2009, the San Francisco-based boutique hotel owner and operator has been looking for distressed opportunities.

“Those with discretionary capital thought this was going to be the buying opportunity of a lifetime, but it never materialized,” says Long. “And I don’t think it’s going to. We went from a market in 2009 largely paralyzed with buyers and lenders in workout situations, to the last six to eight months when the market in our sector — four-star hotels — has normalized very quickly.”

Kimpton was the seller in two of the deals that helped get the ball rolling this year, the Hotel Monaco in San Francisco and the Hotel Monaco Washington, D.C. Neither were distressed assets. Long says the prices were too good to pass up and in line with Kimpton’s original investment plans, which is the reason the company is also marketing another stabilized asset, The Argonaut in San Francisco.

Trickle-down effect
Although the majority of the assets bought by REITs weren’t in distress, they could have a direct effect on those that are. “Buyers are now looking at secondary markets because there’s less competition,” says Alan Reay, president and founder of Atlas Hospitality Group, a hotel research and brokerage firm based in Irvine, Calif.

Reay estimates a third of the transactions and properties on the market in California are distressed. Eaton believes the number is closer to 50% in the U.S. And Al Calhoun, a managing director of Jones Lang LaSalle Hotels’ select-service division, estimates 70% of what his company has on the market is distressed in some way.

The recent sales also have given confidence to lenders and special servicers who are becoming more comfortable taking back assets and putting them on the market. Reay’s firm recently brokered sales of the Marriott Ontario (Calif.) for special servicer Helios AMC and the Mission Plaza in San Diego for LNR Partners. Atlas also brokered the note sale of the Ramada Plaza in San Diego for CWCapital.

Jones Lang LaSalle Hotels and Irvine, Calif.-based Real Estate Disposition LLC last week combined to offer $420 million in primarily non-performing hotel notes and bank-owned real estate in a three-day auction event at auction.com. Calhoun says if pooling notes and assets like this works, it could lead to other servicers and lenders following suit and become a “pressure valve” to help release the backlog of transactions.

“Banks fortunately or unfortunately have a herd mentality,” says Reay. Once a few lenders start selling notes and assets, others could soon follow. He believes it will start with select-service properties that are more cumbersome for lenders to keep because of added legal work and receivership costs as a larger percentage of the smaller loan amounts.

Calhoun says he just completed a call for offers on 10 hotels. “Secondary-type properties in mostly secondary locations, and it generated 20 offers,” he says. “Recovery of the transaction market is happening in all categories.”