43% of select-service hotel investors in ‘buying mode’

UNITED STATES Marking a definite turnaround, U.S. select-service hotel investors have a more optimistic outlook today than they did six months ago.

According to Jones Lang LaSalle Hotels’ biannual U.S. Select Service Hotel Investor Survey, 43% of respondents indicate that they have an overlying ‘buy’ strategy over the next six months, making this the dominant investment intention as investors vie for opportunities to acquire select-service properties priced below replacement cost and historic norms. Mid-market and upper-mid-market assets are the primary target for acquisition.

“Investors want to purchase assets now, to realize the upside inherent in their investments over the next three years,” says Mark Fair, managing director of Jones Lang LaSalle Hotels’ select-service division. “Concurrently, hotel owners recognize that this pent-up demand may lead to competitive bidding, and now are increasingly considering selling assets. Investors’ ‘sell’ sentiment has increased to a two-year high.”

The survey was completed by nearly 300 of the nation’s leading select-service hotel owners and investors. An overwhelming 72% of respondents expect net operating income levels of their select-service hotels to remain flat or increase in 2010 compared with last year. Forty-two percent of respondents expect an increase of 3% or more, and 5% forecast NOI levels to rise by more than 10%.

Looming loan maturities remain a prevailing issue for many investors, with 41% indicating that they have loans maturing over the next six to 12 months. Of the respondents with maturing loans, 34% plan to address the maturity by requesting an extension or loan modification from their lenders, and 14% will address the maturing loans through additional equity injections. The remaining investors are looking to refinance.

“The debt capital market for hotels has reawakened and is ramping back up,” says Al Calhoun, managing director of Jones Lang LaSalle Hotels’ select-service division. “For a hotel with prime location, sponsorship and flag—and most critically, cash flow—there is very attractive debt available for low-leverage financings. The conduits, life companies and banks are all competing on deals. However, there is a steep drop-off in interest if the leverage creeps above 70%, or if there is any sort of story or hair on the deal.”

Investors’ short-term outlook for RevPAR growth in the select-service sector is at its highest point since late 2007. Over the next six months, 83% of respondents expect RevPAR in their markets to be flat or increase, a figure that increases to 92% for the one-year outlook, supporting investors’ confidence for the select-service hotel market and signifying a value recovery with positive momentum.