Manhattan most active U.S. hotel transactions market

NEW YORK CITY The hotel deals volume in Manhattan is expected to double this year, making it the most active hotel transactions market in the United States, according to a new report from Jones Lang LaSalle Hotels.

The investment services firm predicts that Manhattan will see between US$1.9 billion and US$2.4 billion in hotel deals in 2011. The projection is based on the estimated transaction value of properties currently on the market that are expected to trade during the course of the year.

“Hotel transaction levels in Manhattan totaled nearly $12 billion over the past decade, exceeding US$1 billion in 2010 alone. In 2011, we expect hotel deal volume to increase by 90% to 130% over last year’s levels,” says Arthur Adler, managing director and Americas CEO for Jones Lang LaSalle Hotels.

The significant increase in transaction volume will be driven by the dramatic recovery in RevPAR, continued improvement in the debt markets, investors’ intention to sell assets before the 2007-2012 loan terms expire, and currency movements.

“REITs will continue to be active buyers because their cost of capital is very competitive relative to buyers who rely on leverage,” Adler says. “Foreign investors—particularly investors from the Middle East and Asia—will also likely be active, seeking to establish a foothold in the market. Brands are also apt to make selective investments in 2011 and beyond to establish or increase their presence or to reposition their properties.”

Active sellers in 2011 will include institutional funds seeking liquidity, brands in cases where they can improve their assets and retain management contracts and investors seeking to exploit the dramatically improving transactions market and low cap rates.

Market fundamentals are playing a big role in the pick-up in hotel transactions. Manhattan hotels posted the highest growth rates of any major U.S. market in 2010. “Benefiting from increased demand, supply absorption and a healthier economic environment, upper upscale and luxury hotels in Manhattan are expected to achieve RevPAR growth of 10% to 125 in 2011 over 2010 levels. Since occupancy rates are at or near their peak levels, the RevPAR increase will be driven by ADR growth,” says Jeffrey Davis, executive vice president for Jones Lang LaSalle Hotels.

During 2010, approximately 27 new hotels opened in Manhattan, spanning nearly 5,600 guestrooms—well above long-term average annual increases, as a backlog of inventory that had been conceptualized during the peak years came online.  Notwithstanding the dramatic increase in supply, occupancy rates increased during 2010, indicating that all of the new supply was quickly absorbed in to the market.

The city’s supply pipeline is now shrinking. “The number of hotel openings in 2011 is expected to decrease to 13 properties, encompassing approximately 2,900 rooms. For 2012, our analysis identified an additional seven properties due to open spanning 1,200 rooms,” Davis says.

New York’s market dynamics bode well for the near- and long-term outlook for industry fundamentals, particularly as higher-rated corporate and corporate group demand returns. Manhattan will remain the top U.S. hotel investment market, attracting significant attention from domestic and off-shore buyers who want to have a foothold in this key gateway market.