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Investment trends, challenges: LIIC

Results from a survey of the members of The Lodging Industry Investment Council (LIIC) revealed a list of the major U.S. hotel investment opportunities and challenges for the coming year. Altogether, the members of LIIC represent direct acquisition and disposition control of well over US$40 billion of lodging real estate.

Fully, 45% of LIIC hotel investors have successfully purchased a hotel in the last 12 months and an additional 16% have made offers but not been the winner. Moreover, 76% plan to sell a hotel over the next 24 months.

2017 top 10 LIIC survey results

Hotel real estate. Overall, the 2017 LIIC Survey is more positive than 2016 and starkly different than the peak year survey in 2015. Responses reveal a calmness, compared with wide spread nervousness in April 2016. Chinese investment is expected (36%) to slow slightly and Brexit’s impact on US hotels is considered slight. Private equity followed by listed REITs are predicted to dominate the purchase of upscale to luxury hotels; regional owner/operators are projected to dominate the purchase of economy to upper midscale hotels.

Movement in the hotel real estate cycle. Most investors (68%) believe we are still in the extra innings of the current cycle, which began in 2009; however, an astute, highly intelligent minority (32%) believe we have begun a new cycle. Projections for the US economy are positive with 60% forecasting GDP growth averaging greater than 2% over the next 24 months.

Asset pricing bid/ask settles; values flat to maybe increasing. Over the next 12 months, 54% project that lodging real estate values will be flat in comparison to 2016. However, a sizable group (36%) forecast a slight increase in values (up to 5%).  Favorite investment target: upper upscale lodging properties.

The top three threats on the horizon. 1) New lodging supply with 90% of LIIC members citing new hotel supply as the current and dominant top investment concern. Hypocritically, 81% are building new lodging assets. 2) With interest rates increasing gradually up to 100bps over the next 12 months, sellers need to understand the impact on asset pricing for hotels they are looking to sell. 3) Government-mandated minimum wage increases and the corresponding impact on hotel operating costs (74% anticipate a gradual negative impact over the next five years).

Hotel transaction market continues slight cooling. 52% of respondents forecast the dollar volume of U.S. hotel transactions in calendar 2017 will be down relative to year-end 2016 and 22% believe volume will be flat. Similarly, 46% believe the number of assets sold to be down, while 32% anticipate the number of assets sold to be flat.

Hotel debt available, yet less favorable. Hotel investors are “debt leery” causing 56% to seek refinancing of existing debt over the coming year, even though 52% believe the optimum refinance window closed in the last six months. Owners have more concern with interest rate increases on senior debt than lender’s available leverage percentages.

Lodging development marches along. Investor attitude stays positive on the concept of building new lodging properties. As to developing hotels, 66% of LIIC respond “yes, if you are selective about product and markets.” Respondents are putting their money behind their votes with 81% of relevant LIIC members having new hotels actively under development.

Want to buy a hotel? Quantity and quality. 42% of investors believe that a “below average quantity” of hotels are available for purchase, closely followed by 44% at “average quantity.” Fully, 52% believe the quality is average and 28% suggest negatively “slightly worse than 2016.”

Top 25 markets NOT to invest in:

Houston, Texas (64%)
Nashville, Tennessee (32%)
Detroit, Michigan (28%)
New York, New York (28%)
St. Louis, Missouri (28%)

Where to buy? New Orleans! Not one vote against recorded.

Marriott-Starwood merger? If you own a Starwood-branded hotel, 36% surprisingly believe the value of Starwood lodging investments have increased specifically due to the merger. On the other hand, the primary concern (22%) stressing hotel owners is decreasing negotiating leverage with mega Marriott going forward.

Looking forward, the “hotel investment illuminati” predict:

Buyers paying package (5 or more hotels) premium? Maybe not anymore as 53% say no and 47% yes.

Congrats to the 13% of LIIC members that last year predicted the Trump presidential victory; interestingly, 44% now say the Trump administration is positively affecting hotel ownership.

When staying at a hotel on a multiple day business trip, LIIC’s greatest “pet peeves” are painfully slow internet, uncomfortable bedding and noise (hallways, PTACs, and outside traffic). Other peeves include paparazzi, breakfast not starting early enough, and the cost of items in the snack shop being too expensive.

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