Rough Year for Hotel Brokers
One of the factors reflecting the strength of the hotel industry is the number of hotel transactions that occur each year. When the industry is booming, buyers and sellers are actively trading properties and monetizing their investments. Interestingly, sellers are cashing out because they donít usually see the upside potential going forward and buyers are purchasing because they are optimistic about the future investment opportunity. Some call it the greater fool theory.
Most hotel experts thought with hotel values recovering the past several years that 2012 would be a good year for hotel transactions, particularly with all the sellers looking to liquidate their holdings after riding out this last recession. The data, however, shows a different picture.
HVS tracks hotel transactions around the world and uses this information for its appraisal and advisory clients. The following tables show the hotel transaction history for the U.S. since 2000. The first table contains data on all the transactions occurring in the U.S. regardless of size. The second table is for major transactions, which HVS defines as single asset sales of over $10 million.
The two tables show the year the transactions occurred, the number of hotels sold, the total number of rooms contained in those hotels and the average sales price per room. In addition, the table shows year to date information comparing the number of transactions that took place up until November of 2012 with the same time period in 2011.
The best year by both number of transactions and number of rooms was in 2004 when 605 hotels sold with a total of 115,703 rooms. The lowest year for both transactions and number of rooms was at the low point in the recession in 2009, when there were only 177 transactions containing 27,908 rooms.
The transaction market recovered nicely in 2010 and 2011 with 408 and 586 transactions taking place. Looking at year to date November, it is obvious transaction numbers will be much lower than last year.
We estimate the year-end transaction results for 2012 will be about 370 total transactions containing about 57,000 hotel rooms. This is somewhat below the average of 400 transactions per year that has occurred the past 12 years, which is not bad but certainly way below the upward trend line that started in 2009. In addition, the average sales price per room in 2012 will be about the same or somewhat lower than in 2011: $134,000 compared to $135,000. This also interrupts the upward trend in sales price per room, which started in 2009.
The second table shows the results based on major hotel sales. The peak year for major transactions was 2005, when 277 large hotels sold with a total of 80,274 rooms. The bottom of the market was in 2009, when only 46 major transactions occurred with 10,997 rooms. The year to date November numbers show a similar trend as the all hotel sales table with 126 major transactions occurring so far in 2012 compared to 190 last year. We estimate the total number of major transactions in 2012 will be about 140, which is below the 165 average number of major sales for the past 12 years. The average sales price per room will remain level.
With the lack of new hotel supply, somewhat more financing available for hotels, good trends in rate, occupancy and RevPAR and generally increasing hotel values, why arenít there more hotel transactions taking place? The first reason is ó if things are really good ó why sell?
Current owners survived one of the worst hotel economic downturns in memory. They were able to either continue paying their debt-service or they worked something out with their lender. They were true survivors. Looking into the future, things look good. If they donít need the money, they might as well continue riding the cycle upward when values will surely keep increasing.
On the other hand, hotel buyers are a little more pessimistic. During 2012 there was massive uncertainty in the U.S. economy. The presidential race was being brutally fought. The fiscal cliff was looming at the end of the year. The economy in Europe was in shambles and Chinaís economy was cooling. Many hotel buyers seem to be waiting for a clearer economic direction. As a result, sellers didnít want to sell and buyers didnít want to buy.
Hotel REITs, who were many of the major buyers during 2010 and 2011, were also on the sidelines because the uncertainty and volatility of the stock market prevented them from raising acquisition capital.
Hopefully 2013 will be a better time for transactions. If we donít fall off the fiscal cliff, values in most markets will be peaking, the global economy will be recovering, the stock market will be heading upward with less volatility, sellers will be realizing huge profits, buyers will be doing transactions and everyone will be happy.
Steve Rushmore is president and founder of HVS, a global hospitality consulting organization with offices around the world. Steve has provided consultation services for more than 12,000 hotels throughout the world during his 35-year career and specializes in complex issues involving hotel feasibility, valuations and financing. He can be reached at email@example.com or 516 248-8828 ext. 204.