Hotels Investment Outlook

Hotels
Investment Outlook
United States | Q2 2015
Hotels
Encouraging fundamentals and rising interest from foreign capital
sources drive surge in U.S. hotel investment
Global Hotels investment
$42.9
56.0%
Investment sales (YTD, billions of $US)
Annual investment sale growth (YTD)
U.S. Hotels investment
$23.0
93.8%
Investment sales (YTD, billions of $US)
Annual investment sale growth (YTD)
29.0%
-23 bps
12-month change in pricing (per key)
12-month change in cap rate (bp)
U.S. Hotels forecast
$31.0
16.1%
Investment sales (FY, billions of $US)
Annual investment sale growth (FY)
Hotel investment sale
volumes
(billions of $US)
With $23.0 billion of hotel transactions, deal volume nearly doubled
in the first half of 2015
$80.0
$60.0
$40.0
$20.0
$0.0
Q1
Q2
Q3
Q4
Source: JLL Research
Hotel cap rates continue to decline with cap rates for full-service
hotels in both primary and secondary markets hitting record lows
12.0%
9.0%
7.8%
6.0%
6.8%
3.0%
2.4%
0.0%
10-year Treasury (%)
Secondary markets, target cap rate (%)
Source: JLL Research, Moody’s Analytics
Primary markets, target cap rate (%)
The U.S. lodging market enjoyed strengthening fundamentals and
surging investor interest in the first half of 2015. Low supply growth in the
context of robust demand growth allowed for strong revenue per
available room (RevPAR) gains. Record-breaking inflows of off-shore
capital also contributed to extraordinary growth in acquisitions volume.
With performance fundamentals and foreign interest in U.S. hotel assets
expected to remain strong, we are bullish on the U.S. lodging sector.
• In H1 2015, RevPAR for U.S. hotels increased 7.3 percent yearover-year, following growth of 8.3 percent in 2014. Moderate
economic growth has provided the fuel for rising lodging demand,
and given relatively limited supply growth, hotel occupancy in the
U.S. has risen to the highest level seen in nearly two decades.
• RevPAR growth is anticipated to remain strong for the next
several years barring any unforeseen demand shocks. The national
pipeline implies a continuation of below-average supply growth, while
moderate economic growth is expected to continue to buoy lodging
demand. As long as this dynamic prevails, operating fundamentals
for the U.S. lodging sector will remain strong.
• Hotel transaction volume soared to $23.0 billion in H1 2015. This
level of acquisition activity amounts to a near doubling of hotel
investment sales year-to-date. Investors who purchased earlier in the
cycle are now looking to unlock gains and potentially redeploy
capital, while private equity investors in search of yield have
remained active buyers in the market.
• Offshore capital has become a major force in the U.S. hotel
investment market. Weak economic growth prospects in many
international markets as well as the recent liberalization of China’s
regulations concerning large overseas investments have resulted in
a flood of foreign capital pursuing U.S. hotel assets.
• Cap rates for the U.S. hotel sector have continued to decline
with foreign investors pursuing Trophy assets at low relative return
thresholds, resulting in hotel trades at exceptionally low cap rates.
• Average price per key has increased significantly given the
current environment of strengthening operating fundamentals,
enhanced market liquidity and falling cap rates.
• Interest rate increases present a potential threat to asset
pricing. However, steady inflows of foreign capital to U.S. assets are
expected to soften the impact of any increase in the fed funds rate.
JLL | United States | Hotels Investment Outlook | Q2 2015
1
RevPAR rising substantially with rate increases now driving the majority of growth
$100
70.0%
65.0%
60.0%
55.0%
50.0%
$50
$0
RevPAR
Source: Smith Travel Research
Occupancy
RevPAR
Occupancy
RevPAR for U.S. hotels increased more than 8.0 percent in 2014, and the sector is on pace to record another year of solid growth in 2015 with
RevPAR rising more than 7.0 percent in the first half of the year. At this point in the cycle, ADR is driving the majority of RevPAR gains, as hotel
occupancy appears to be approaching its structural limit in many markets. In fact, U.S. hotel occupancy amounted to 64.4 percent in 2014, the
highest level recorded since 1996, and year-to-date growth in 2015 has amounted to a further 2.4 percent increase. While transient demand
growth has increased steadily since the market trough in 2009, group demand growth just recently turned positive in mid-2014 and rapidly
surpassed transient demand growth by year-end. The recovery of group demand is allowing hotels to yield rate more effectively with ADR for the
transient segment increasing more than 5.0 percent in 2014 compared to just over 3.0 percent in 2013, when group demand was still wavering.
While the current cycle may seem advanced in that 2015 is
likely to mark the sixth consecutive year of RevPAR
growth, the more nascent recovery in group demand
suggests that considerable runway likely remains. As long
as supply growth remains moderate, the recovery in group
demand should allow for increased rate compression.
Accordingly, we expect that transient rate growth will
continue to drive strong RevPAR growth going forward.
Supply growth expected to remain below the historical average for the next few years
Absolute room supply
Supply annual % increase
Long-term average supply increase
4,000,000
6.0%
Annual rooms available %
change
6,000,000
4.0%
2015F
2012
2009
2006
2003
2000
0.0%
1997
0
1994
2.0%
1991
2,000,000
1988
Absolute U.S. room stock
Supply growth for the nation’s lodging stock has been muted in recent years with 2014 marking the fifth consecutive year of below-average
annual growth in the number of U.S. hotel rooms. While improving hotel operating performance, declining cap rates and easing debt markets are
once again spurring new hotel development, the current pipeline suggests that annual supply growth is likely to remain below the historic
average through at least 2016.
Source: JLL Research, Smith Travel Research
Several factors are keeping new hotel development in check. As the
economy has recovered, construction costs have increased materially,
challenging the feasibility of new full-service hotel projects in lowerrated markets. While the availability of construction financing has
improved significantly in recent years, lender requirements for investor
equity have generally remained above pre-recessionary levels.
Moreover, non-recourse debt for new hotel development in resort and
tertiary markets as well as for projects involving residential
components has remained relatively constrained. As a result, selectservice hotels in key primary and secondary markets comprise most
new development with supply growth for other market segments
remaining more muted.
Hotel investment sales nearly doubled in H1 2015 with private equity buyers driving deal volume
$60.0
Private equity buyers
All other buyers
$40.0
$20.0
Source: JLL Research
H1 2014
H1 2015
$0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
U.S. hotel transaction
volume (billions of $US)
In the first half of 2015, hotel transaction volume surged to $23.0 billion, representing a 93.8 percent increase relative to the first half of 2014.
Private equity groups have been the dominant force in the transactions market, accounting for the largest share of both acquisitions and
dispositions. Investors seeking to realize gains on hotels acquired earlier in the cycle are bringing deals to the market, and these investors are
frequently redeploying their sale proceeds in the sector. Investors chasing yield in the current low cap rate environment are also looking toward
hotel investments given relatively attractive returns for this asset class.
While private equity appetite for hotel real estate increased
further in H1 2015, with acquisitions rising 77.0 percent yearover-year to more than $10.0 billion, their total share of hotel
acquisitions declined from 52.0 percent in 2014 to 44.0
percent. The decline in private equity market share, however,
appears to be due to further diversification in the buyer pool
rather than waning interest. In particular, institutional investors
emerged as a key player in the market with their share of
investment rising from 1.0 percent in 2014 to 10.0 percent at
mid-year following several blockbuster transactions.
JLL | United States | Hotels Investment Outlook | Q2 2015
2
Offshore capital has contributed substantially to rising hotel market liquidity
Cross-border hotel acquisitions
(millions of $US)
Cross-border investment in U.S. hotel acquisitions amounted to $6.6 billion in the first half of 2015, representing nearly 30.0 percent of total deal
volume. This level of foreign investment in U.S. hotel acquisitions amounts to more than a threefold increase compared to the first half of 2014,
and with half of the year still ahead, 2015 has already seen the highest level of cross-border investment since 2007. While a handful of highprofile deals, including the sale of the Waldorf Astoria New York for nearly $2.0 billion and the Manhattan at Times Square for more than $500
million, account for much of this year’s cross-border investment, these deals are unlikely to stand out as anomalies going forward.
$5,000.0
In 2014, the Chinese government relaxed regulations that had previously
subjected overseas investments in excess of $100 million to an arduous
approvals process. As a result, Chinese investors–and Chinese
insurance companies, in particular–have emerged as a significant
source of offshore capital. This powerful trend is likely only just
beginning. At the same time, Middle Eastern groups have remained
active in the sector despite declining oil prices with the Abu Dhabi
Investment Authority recently purchasing the Edition New York for $343
million. Overall, current economic woes abroad are expected to further
fuel foreign investment in U.S. hotel assets, as international groups seek
the relative stability and security of U.S. markets.
$4,000.0
$3,000.0
$2,000.0
$1,000.0
$0.0
2011
2012
2013
2014
Source: JLL Research
H1
2014
H1
2015
Cap rates have steadily declined with Trophy properties in primary markets trading for exceptionally low yields
Per our most recent Hotel Investor Sentiment Survey in December 2014, investors’
targeted capitalization rates declined to 6.8 percent for full-service hotels in primary
markets compared to 7.0 percent approximately 6 months prior and 7.1 percent a
year ago. Targeted capitalization rates for full service hotels in secondary markets
averaged 7.8 percent, which amounted to no change relative to 6 months previously
and a small decline from 8.0 percent a year prior. Cap rates in both primary and
secondary markets are at their lowest level since we introduced the Hotel Investor
Sentiment Survey in 2000.
13.0%
12.0%
Average target hotel cap rates
Chinese investors’ pursuit of Trophy hotel properties in primary U.S. markets has
resulted in several hotel trades at exceptionally low cap rates in 2015. The Waldorf
Astoria New York, Baccarat Hotel New York and Waldorf Astoria Chicago sold to
Chinese investors for reported cap rates of approximately 2.0, 3.0, and 3.0 percent,
respectively. In contrast to U.S. private equity buyers, who often have a relatively
short investment horizon and high return requirements, Chinese investors tend to
have a longer-term, even multigenerational, outlook. Iconic hotel properties in the
U.S. are viewed as secure long-term investments, and recent instability in Chinese
equity markets and concerns about the integrity of the euro zone are likely to further
increase the appeal of hotel real estate in the U.S. for foreign investors.
Full service hotels, primary markets
Full service hotels, secondary markets
Select service hotels, all markets
11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
H2 2008
H1 2009
H2 2009
H1 2010
H2 2010
H1 2011
H2 2011
H1 2012
H2 2012
H1 2013
H2 2013
H1 2014
H2 2014
5.0%
Source: JLL Research
Target hotel cap rates in select primary and secondary U.S. markets
Seattle
WA
7.1%
OR
San Francisco
6.3%
NV
CA
Hawaii
6.5%
MT
ID
UT
Primary Hotel Markets
Secondary Hotel Markets
Denver
CO7.7%
NM
WI
SD
WY
Chicago MI
7.3%
IA
NE
IL
KS
IN
MO
OK
Dallas
7.9%
TX
Houston
7.8%
Boston
NH 6.8%
MA
NY
Philadelphia
CT
RI York
7.9%NJ New
6.1%
DE
Washington,
DC
WV
MD
PA 7.2%
VA
VT
MN
Los Angeles
7.0%
San Diego Phoenix
AZ
8.1%
7.2%
Source: JLL Research, Hotel Investor Sentiment Survey
ME
ND
OH
KY
TN
AR
MS
NC
Atlanta SC
AL 8.0%
GA
LA
FL
Orlando
8.1%
Miami
6.8%
JLL | United States | Hotels Investment Outlook | Q2 2015
3
$300,000.0
$250,000.0
$200,000.0
$150,000.0
$100,000.0
$50,000.0
Source: JLL Research
T-12 June 2014
T-12 June 2015
$0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Single-asset average price per key
Average price per key has risen significantly given strong fundamentals and Trophy asset sales
The average price per key rose to $241,000 for the 12-month
period through June 2015, representing an increase of 29.0
percent year-over-year. Declining cap rates, strengthening
operating fundamentals and robust market liquidity have all
contributed to the substantial appreciation of hotel real estate
assets. The recent preponderance of Trophy property sales has
also certainly contributed to the large increase in average price
per key with the Baccarat Hotel New York, the Montage Laguna
Beach and the Waldorf Astoria New York trading this year for
approximately $2.0, $1.5, and $1.4 million per key, respectively.
Still, the median price per key for the latest 12-month period
posted a nearly identical year-over-year increase of 28.0 percent,
illustrating that asset price appreciation has, in fact, been rather
widespread.
Interest rate increases present some risk for cap rates going forward, though the impact is expected to be muted
14.0%
Avg. Target Hotel
Cap Rate*
10-Year Treasury
Yield
Federal Funds
Target Rate
Cap Rate: -174 bps
Treasury Yield: +61 bps
Fed Funds Rate: +425 bps
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
*Investors' average target capitalization rates for full service hotels,
per the JLL Hotel Investor Sentiment Survey.
Source: JLL Research, Federal Reserve Board
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0.0%
Given a relatively constrained supply outlook and expectations for
stable demand growth, the impact of future increases in the federal
funds rate on hotel capitalization rates likely represents the most
notable wildcard for hotel asset pricing. In the current cycle, declining
interest rates–and Treasury yields–have generally corresponded with
downward pressure on hotel cap rates, suggesting that expectations for
increases in the federal funds rate by year-end could ultimately put
upward pressure on cap rates. Still, there are several reasons to
anticipate a muted impact, if any at all. To the extent economic woes
abroad continue to funnel foreign investment into U.S. assets, the
ultimate impact of federal funds rate increases on Treasury yields and
real estate cap rates may be rather limited. Furthermore, in the last
growth cycle, cap rates continued to decline in spite of movement in
Treasury yields due to strong operating fundamentals and abundant
market liquidity. Given these trends are expected to remain in place,
hotel cap rates are anticipated to stay low as long as increases in the
federal funds rate are moderate.
JLL | United States | Hotels Investment Outlook | Q2 2015
4
Portfolio transactions, Q2 2015
Property
Buyer
Seller
Market
Price
Size (rooms)
Price per key
Equity Inns 116-Hotel Portfolio
Arc Hospitality Trust
Whitehall Real Estate
Multiple
$1,808,000,000
13,744
$132,000
Great Wolf Resorts Portfolio
Centerbridge Partners
Apollo Global Management
Multiple
$1,350,000,000
3,579
$377,000
Paulson 3-Hotel Portfolio
The Blackstone Group
Paulson & Co. Inc.
Orlando, Phoenix
$1,300,000,000
2,530
$514,000
GEM 2-Hotel Portfolio Orlando
Hilton Worldwide
GEM Realty Capital
Orlando
$760,000,000
1,499
$507,000
Highland Portfolio (28% Stake)
Ashford Hospitality Trust,
Inc.
Prudential Real Estate Investors
Multiple
$490,311,000
8,379
$59,000
OTO Development Portfolio II
The Blackstone Group
OTO Development
Multiple
$330,000,000
2,385
$138,000
Crestwood Suites & Sun Suites
& HTS Portfolio
Starwood Capital Group
Mount Kellett Capital
Management
Multiple
$300,000,000
6,042
$50,000
TMI 183-Hotel Portfolio
Starwood Capital Group
TMI Hospitality
Multiple
$299,379,106
3,983
$75,000
RLJ 24-Hotel Portfolio
Unknown
RLJ Lodging Trust
Multiple
$240,000,000
2,924
$82,000
Price
Size (rooms)
Price per key
Notable single asset transactions, Q2 2015
Property
Buyer
Seller
Market
Waldorf Astoria New York
Anbang Insurance Group
Hilton Worldwide
New York
$1,950,000,000
1,413
$1,380,000
The Manhattan at Times Square
Hotel
Al Faisal Holdings
Rockpoint Group
New York
$535,000,000
689
$776,000
Luxury Collection The
Phoenician
Host Hotels & Resorts
Starwood Hotels & Resorts
Worldwide, Inc.
Phoenix
$400,000,000
643
$622,000
Montage Laguna Beach
Strategic Hotels & Resorts Ohana Real Estate Investors
Orange County
$360,000,000
248
$1,452,000
Park Central Hotel San
Francisco
LaSalle Hotel Properties
Westbrook Partners
San Francisco
$350,000,000
681
$514,000
Waldorf Astoria Casa Marina
Resort
Hilton Worldwide
The Blackstone Group
Florida Keys
$348,000,000
311
$1,119,000
Edition New York
Abu Dhabi Investment
Authority (ADIA)
Marriott International, Inc.
New York
$343,000,000
273
$1,256,000
Gencom Group
Miami
$328,600,000
302
$1,088,000
KSL Resorts
Miami
$278,000,000
393
$707,000
Ritz-Carlton Key Biscayne Miami WP Carey & Co., Inc.
The Royal Palm Miami
Chesapeake Lodging
Trust
JLL | United States | Hotels Investment Outlook | Q2 2015
5
For more information, please contact:
Investor
Sean Coghlan
Director, Investor Research
+1 215 988 5556
sean.coghlan@am.jll.com
Hotels
Kent Michels
Director, Hotels Research
+1 312 228 2927
kent.michels@am.jll.com
Click for more Hotels Research, or to learn more about our Hotels and Hospitality Group.
About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased
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management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118
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information, visit www.jll.com.
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