Americas hotel transactions to reach US$13b in 2011, JLLH predicts

AMERICAS Jones Lang LaSalle Hotels has upped its outlook and projects that hotel transaction volume will reach US$13 billion in the Americas region in 2011, and the firm believes the United States will be one of the most active hotel transaction markets globally in 2011.

As investors unleashed pent-up capital, deal volumes increased dramatically in 2010. Equity-rich buyers wasted no time getting back into the game. Transaction volumes gained momentum as the year progressed and are on track to total US$10.5 billion in 2010—nearly five times the prior-year levels when including the Extended Stay America acquisition—with 95% of total Americas deal activity taking place in the United States.

The Americas transaction pace is expected to notch up another 25% in 2011, with volumes totaling up to US$13 billion. “Due to additional capital raises, REITs are expected to continue to be dominant buyers in 2011, and private equity groups and institutional investors will increasingly join the mix as leverage levels and terms improve,” says Arthur Adler, JLLH managing director and Americas CEO. “The expanded depth of active buyer groups, along with a greater number of lender-driven sales, are the key drivers behind our increased projection for deal volume.”

The firm’s forecast refers to asset transactions and does not count note and loan sales, restructurings that require fresh equity and deed-in-lieu transfers.

Big-ticket sales are back, and due to the abundance of equity in the marketplace and slowly easing debt markets, the number of transactions above the US$100 million mark is expected to tick up further in 2011.

“One of the reemerging sources of capital in 2011 will be the outflow of capital from the Middle East,” Adler says. “Having faced dislocation at home over the past 18 months, Middle Eastern investors will again vie for prime acquisition opportunities in East Coast markets. Asian high-net-worth investors, which accounted for 8% of purchases by volume in the United States in 2010, are expected to continue to feature in 2011, targeting prime assets in major markets—primarily in the western U.S.,” Adler says.

Transactions in the United States will continue to be the driving force of deal activity across the Americas region, but Canada will also see an uptick in hotel sales in 2011. Mexico, the Caribbean, and Central and South America will continue to be more tightly held investment markets, with new hotel development opportunities emerging as the primary opportunities for investors.

“South America will offer tremendous investment opportunity over the next decade,” says Gregory Rumpel, a Miami-based JLLH executive vice president. “Investors’ focus will be on new development, which is accompanied by large-scale opportunity in Brazil and a number of other key economies in the region.”

South America’s hotel transaction market is still relatively undeveloped, though it will slowly continue to open up over the medium term. Dominated by domestic and intra-regional investors, most of whom are long-term holders, the number of hotels that come to market in 2011 will be limited. Assets more likely to transact are those held by international investors. “Due to the restrictive local financing conditions in South America, most hotel investments were financed with local capital and were not highly leveraged,” Rumpel says. “Therefore, bank-forced sales will continue to be immaterial in the region.”

Operating performance posted positive growth in most major markets across the Americas in 2010, and investors have been able to call the floor, which, coupled with the broad cross-section of equity capital pledging to be invested in solid opportunities is leading to a more optimistic outlook for next year, Adler says.