Brokers see boost in business: confidence, interest rates spur transactions

Hotel & Motel Management, May 3, 2004 by John P. Walsh

National Report--Brokers are busy because of the increased volume of hotel transactions, and they expect things to continue at this pace this year and next.

Bob Hunter, president of Hunter Realty, said he's seeing more interest in hotel transactions because there's overall confidence in the market, interest rates are holding, the economy is improving, buyers and sellers are coming closer together on price, there's realism on the sellers' part and lenders are ready to make loans.

"Investors are more realistic about their returns," Hunter said. "They've adjusted their expectations."

Hunter said the slowdown of hotel building also has helped boost transaction volume.

"It's given people a chance to recoup," he said.

Mike Cahill, president of Hospitality Real Estate Counselors, said there's always been good activity below the $3-million mark. From $3 million to $10 million, the market has been average, and above the $10-million mark, transactions have started to increase significantly.

"People will be shocked by the end of 2004 about how many hotel transactions there have been," Cahill said.

Al Calhoun, partner with Thompson Calhoun Fair, said he expects the firm to sell 60 to 65 hotels this year. It's sold 15 so far.

"The transaction volume has picked up because of the increased confidence in the economy," Calhoun said.

Art Adler, managing director for Jones Lang LaSalle Hotels, said the company sold $2.6 billion of real-estate last year. He predicted that number will increase this year.

"Hotels are better than other forms of real-estate because hotels aren't getting any worse," he said. "There is a lot of capital and debt in the system, and the supply pipeline is shrinking."

David Mumford, president of Mumford Co., said 2004 started off slow, but transaction volume has picked up and looks like it will be better than last year.

Mumford Co. handled 54 transactions last year, and currently, it has 27 properties under contract.

Steve Marx, president of Hotel Source, said the company's sales volume has doubled so far this year compared with last year.

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"We're still seeing a lot of owner/operators buying from midsized management companies," Marx said.

Cahill said better-quality assets have come on the market because prices have improved.

Marx said buyers are looking for different things.

"We marketed a limited-service property that was 5 years old in a highway location, but the hotel wasn't performing that well, and it sold right away because people were more focused on the location and the brand than the bottom line," he said. "In contrast to that, there was a full-service hotel in a downtown location that was 35 years old and performing well, but that hotel took much longer to sell."

Hunter said there are two tiers of hotels being sold. Tier one is the desirable properties, and tier two is the properties that are sold on price alone.

"There are more hotels in tier two than you think," he said. "Age is a huge factor."

Cahill said the bid/ask price spread is closer than it has been during the past couple of years because interest rates are low, allowing cheaper debt, and buyers have reduced their rate-of-return requirements.

Calhoun said that as the confidence of buyers increases, they're more willing to look to the future and believe the hotel will do better down the road.

"Most sellers have not come down in price," he said.

Marx said Hotel Source is achieving 90 percent to 95 percent of the listing price on sales.

Mumford said that in the economy segment, there was never really a bid/ask price difference.

"We've had successes with Super 8s," he said. "As you go up the segment, the bid/ask spread increases. But we've been seeing more transactions at the higher end of the market."

Hunter said there's been discussions about alternative uses for old hotels, such as the 30- or 40-year-old exterior-corridor Holiday Inns that are on the market. He said demolition isn't that common because rarely does one find the land value to be worth more than the hotel, no matter how bad it's performing.

"In the past 18 months, we've sold more hotels that went out of hotel use than during the past 15 years," Calhoun said. "We're seeing more and more of that.

Nice properties are sold for a variety of reasons, but mostly for strategic repositioning.

"There is a lot of money out there," Hunter said. "It's a seller's market. There's a high demand for nice hotels."

Hunter said an interesting phenomenon is that lenders are being patient with borrowers, unlike during the early 1990s. He said lenders don't have a compulsion to sell a hotel right away after it gets returned to them from a deliquent borrower. Lenders keep it, turn it around and sell it, and even make a few dollars doing so. Many lenders found that the hotel business is difficult, he said.

Cahill said transaction volume will increase during 2004 and 2005.

"'05 will be a banner year," he said. "You can probably look to see trophy assets coming to market in '05 as valuation increases."