Originally published in AAHOA Lodging Business, October 2008

What’s Happening in Select Service Hotel Investment?

Despite economic conditions, now may be a good time to buy and sell in certain sectors.

By Ros Mallory

Hotel investment deals continue to get done today amidst turmoil in capital markets and economic uncertainty. According to the Jones Lang LaSalle Hotels U.S. Select Service Hotel Investor Survey from August 2008, select service hotel buyers currently outnumber sellers four to one. Deal volume of select service assets has not been affected as much as more expensive, full service assets.

Buyers in the current market outnumber sellers nearly 4:1.

Select service hotel investors are becoming more sophisticated and increasingly are pricing assets off of current cash flow and applying appropriate cap rates. The changing appetite of both investors and lenders are changing the way all parties are looking at hotel investments. Buyers are now required to bring more equity to the closing table than in the last few years, and lender underwriting criteria has gotten much stricter. All of this is causing those in the investment community to be much more selective about their hotel investments.

According to Jones Lang LaSalle Hotels’ survey, the debt markets are currently most receptive to branded, high quality assets. The mid-market remains the most sought after select service segment, with 38 percent of investors intending to buy and/or develop in this segment over the next six months. The mid-market benefits from a limited scope of operations, making properties less vulnerable to increases in labor and commodity costs. Branded mid-market hotels are able to draw high levels of guest retention during various economic cycles.

How are hotel brokerage firms changing in the current environment? The responsibility of hotel brokerage firms today is much more of an advisory relationship than a traditional transaction focused relationship. As an advisor, it is critical to provide clients with accurate, up to date market information and assist them in making the best long term decisions about their investments. In today’s turbulent environment, often the advice is to hold through the cycle, but also to begin to set a disposition plan so that investors can maximize value at which point it becomes the right time to sell. On the other hand, with the flight to quality philosophy by today’s investors, the time to sell may be now as there are a limited number of high quality assets on the market. With buyers significantly outnumbering sellers, competition for good quality assets continues to be very high. This is helping to keep hotel values up.

Today, more hotel investors are sitting on the sidelines waiting for the market to decide which direction it is going to move. Based on results from the survey, economic uncertainty is taking a toll on investor confidence, with most investors anticipating neutral or negative hotel performance in the short term. The additional room supply entering the market, combined with the forecast of sluggish demand growth, due to high gas prices, declining business travel and a slowing economy, is anticipated to affect hotel occupancy in the near term. But investors’ two-year outlook is mostly positive, improving since early 2008. The optimistic medium term outlook is indicative of the resilience and cyclicality of the hotel sector.

Current data on the state of investment targets in the select service sectors.

With regards to economy branded hotels, the number of investors interested in buying and developing in this segment has increased. Economy hotels are less expensive to construct and are not as directly tied to the current economic down-cycle. The debt market also remains fairly liquid for smaller transactions, especially with local relationship lenders and through SBA programs.

So is it a good time or bad time to buy or sell a hotel? The answer to that depends on a lot of different criteria. Hotel brokerage and advisory firms are valuable resources to use, especially during challenging economic times. Having up to date, real time information is critical and the best firms today have that and are prepared to advise clients on how best to react to this information both short term and long term.

Ros Mallory is senior vice president with Jones Lang LaSalle Hotels. He is based in Charlotte.

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