Approaching the peak?

Over the past several weeks some of my clients — which include owners, operators, developers and lenders — have described the U.S. hotel investment market using the following adjectives: frenzied, frothy, on fire and overheated. During 2012, several stock-market pontificators opined that the Dow Jones Industrial Average at a level of 13,500 was more than 50% overvalued. Nearly three years later the Dow currently trades at just over 18,000.

Obviously, only the passage of time will allow for a definitive retrospective assessment of today’s hotel investment climate. With everything said, consider the following:

  • Record-setting pricing of hotel assets is occurring in many of the nation’s markets.
  • Interest rates and hotel capitalization rates have been at record-low levels for several years.
  • U.S. hotel industry metrics including supply, demand, occupancy, ADR, RevPAR and revenue have recently recorded all-time highs.
  • During the last three downturns, RevPAR percent change remained positive for 80, 31 and 56 months, respectively; through May 2015 the figure is 63 months.
  • U.S. hotel rooms under construction and in final planning have increased 23% this year compared with the same period last year.
  • A dizzying array of new hotel brands have recently debuted (including the Debut Collection!) including but not limited to Augustus, Canopy, Cordis, Curio, Equinox, Even, Graduate, Hyatt Centric, Lark, Loews Regency, Moxy, OE Collection, Quorvos Collection, Radisson Red, Salt, Tao, Tommie, Tribute Portfolio, Proper, Triumph, Unscripted, Venu, Vib and Zoku.
  • In April 2015, CMBS lenders originated US$8.9 billion in new commercial real estate loans, almost twice the amount of the US$4.6 billion in CMBS loans originated during April 2014.
  • The S&P 500, Dow 30 and Nasdaq have all recently recorded new record highs.
  • Hotel real estate is inherently cyclical and driven by specific submarket conditions where a property is located. While pricing of several recent notable hotel trades have raised eyebrows, there continues to be compelling yield opportunities available in select primary and secondary markets. 

It is a fact that the U.S. hotel investment arena has been vibrant during this rising market. Yield chasing capital including domestic and the recent wave of off-shore monetary inflows have contributed to the rapid acceleration of hotel asset pricing. Frenzied, frothy, on fire, overheated — call it whatever you like. America’s hotel investment market today is what it is.