Hotel Investment Returns, Burgeoned by Secondary Markets

While hotel investments are up across the board and some major deals have just completed, the second- and third-tier markets look to have the most activity in the upcoming months.

In a way, you could call it the lagging indicator of the lagging indicator: Hospitality investment isn’t usually on the forefront of an economic recovery. When you start to see movement in the sector, however, deals typically aren’t far behind. Lately, headlines in the hotel world have been filled with high-profile purchases — earlier this week, Pebblebrook Hotel Trust and Denihan Hospitality Group wrapped up a $910 million joint venture, for example — and there seems to be no shortage of buyers ready to capitalize on the return of business and leisure travelers.

“The Pebblebrook deal confirmed what our research showed,” said Eric Lewis, executive managing director of the hospitality and gaming group of Cushman & Wakefield. “Savvy, well-capitalized investors are still focused on top-tier markets and we’re expecting to see interest on the part of other buyers seep into secondary markets.”

And those top-tier markets have been busy. According to Real Capital Analytics, the New York City market accounted for 18.6 percent of all hotel sales from the beginning of 2009 through the second quarter of 2011 in deals exceeding $10 million. The next-largest cities, San Diego and San Francisco, come in at 8.6 and 7.6 percent, respectively. Those three cities, in addition to South Florida, Los Angeles, Washington, D.C., Dallas, Chicago and Boston, collectively total 60.5 percent of hotel sales nationwide. Clearly, while the sector has seen increasingly large transactions, they’re concentrated in major metropolitan areas. Not surprisingly, lenders have been more willing to lend on assets in those markets. In the last month alone, some major deals have occurred: Host Hotels & Resorts, Inc., purchased the Grand Hyatt Washington, D.C., for $442 million; Chatham Lodging Trust added five Inkeepers hotels — two in Washington, D.C. — for $195 million; and New World Hospitality purchased Dallas-based Rosewood Hotels & Resorts, L.L.C., for $229.5 million.

During the economic slowdown, the typical hotel indicators of average daily rate, occupancy and RevPAR remained sluggish in secondary areas. While the top nine markets across the United States saw a 10.5 percent increase in RevPAR in March 2011 as compared to March 2010, all other markets saw that number increase by only 7.7 percent. “Improvement in bottom-line performance is going to be occupancy- and rate-driven,” Lewis said. “New York City, for example, is as full as it can get, so most of that improvement is going to be driven by smaller markets.”

According a July 2011 report by Cushman & Wakefield, the real estate solutions firm expects to see a “marked increase” in hotel investment activity in second- and third-tier markets, assuming there are no other factors that would derail a recovery. “The debt ceiling certainly caused uncertainty,” Lewis said, “and markets don’t like uncertainty. While I can’t see the debate as having a positive effect, the question remains: Will it have a negative one?”