US select-service sector poised for active year

The U.S. select-service sector should have a busy 2012, with 42% of select-service hotel investors targeting acquisitions in the coming year, according to Jones Lang LaSalle Hotels (JLLH).

According to JLLH’s biannual U.S. Select Service Hotel Investor Survey — completed by nearly 200 select-service hotel owners and investors — investors’ “buy” sentiment remains at one of the highest points recorded in the survey; at the same time, respondents’ intentions to sell increased 6.5 percentage points, marking an all-time high since the survey began.

“The next two years could be consecutively bigger years in terms of deal volume, given that as much as US$30 billion in hotel CMBS loans face an initial maturity date between now and 2013. However, liquidity will be the driving factor of just how much activity we’ll see,” said Al Calhoun, managing director of JLLH’s select-service division. “Price discounts won’t be huge, but they will be below replacement cost in many cases.”

In terms of acquisitions, half of investors surveyed are targeting the purchase of distressed assets as their first investment choice. Additionally, an increased 8% of investors are exhibiting strong interest in bidding on underperforming loan and note portfolios.

Survey respondents’ targeted capitalization rates for select service acquisitions over the next six months average 9.8%. Since peaking in mid-2009, investors’ cap rate expectations marked a downward trend in each survey period, declining by approximately 170 basis points overall as the investment environment improved considerably.

“This marks the first survey period where expected cap rates have not decreased further, but rather flattened out,” Calhoun said. “This is indicative of the increased economic uncertainty, along with the lack of financing. But our respondents generally do not expect cap rates to increase over the next six months, indicating that hotel values should hold steady.”

The surveyed investors’ outlook for RevPAR growth in their select-service portfolios remains confident, with 40% of respondents expecting RevPAR to increase 3% to 5%. An additional 20% of investors expect RevPAR to increase more than 5%. “While the sector is not immune to the current economic uncertainty, responses overall confirm that there are very few signs of the investment community expecting a fall-off in performance in 2012,” Calhoun said.