Select Service Segment Positioned to Improve and Lead Hotel Market’s Rebound

From an investor's perspective, it's going to be a positive year for the hotel market's select service segment, according to real estate services firm Jones Lang LaSalle Hotels' bi-annual U.S. Select Service Hotel Investor Survey.

April 6, 2010
By Barbra Murray, Contributing Editor

Courtesy Flickr Creative Commons user LipBomb

From an investor’s perspective, it’s going to be a positive year for the hotel market’s select service segment, according to real estate services firm Jones Lang LaSalle Hotels’ bi-annual U.S. Select Service Hotel Investor Survey. For the first time in over two years, investors are anticipating meaningful change for select service properties, from increased RevPAR to compressed cap rates.

No one is expecting miracles, but the outlook for the select service segment is quite promising. Of the 300 select service hotel owners and investors participating in the survey, 53 percent forecast flat or increasing RevPAR over the next six months, and expectations for the longer term are even brighter; 85 percent expect flat or increasing RevPAR over the next 12 months.

And there’s more good news. Respondents see cap rates for new purchases falling to 10.8 percent over the next six months, a decline of 70 basis points from the anticipated rate reported in JLL Hotels’ previous bi-annual report. Cap rate expectations for properties located in the suburbs and off highways decreased the most, with an 80 basis points drop from 11.4 to 10.9 percent.

Sales activity is also headed for an upsurge. As indicated by respondents to JLL Hotels’ survey, investors are ready to get off the sidelines.

“They have been sitting on a lot of cash and waiting for a signal that the market is at bottom, or so low that the value of a property they acquire won’t be 18 percent less tomorrow,” Mark von Dwingelo, Senior Vice President with JLL Hotels, told CPE. “The signals that are starting to come out indicate that it can only get better.”

While values for average select service properties plummeted 10.8 percent between June 2008 and January 2009, and an even more staggering 18.6 percent between January 2009 and June 2009, metrics from the survey point to stabilization; from June 2009 to January 2010, the values held steady.

With asset values at as low as they’re going to go in this real estate downturn, investors have their eye on the distressed market, of course. Over 60 percent of survey participants responded that they are “aggressively targeting distressed assets as their first choice for investment.”

Actually, as von Dwingelo noted, there are two main camps of buyers. “One is the camp that is chasing assets that are cash flowing; the ones that have taken all that’s been thrown at them and are still generating cash,” he said. “The other camp consists of the more entrepreneurial investor looking at the wide range of distressed assets. They’re less risk-averse; they’re investing for the long-term. But the distressed properties have been a little slow to come to the market.”

Distressed or no, select service properties are high on investors’ lists.

“In this particular downturn, there’s no sector of the hotel market that hasn’t gotten hammered, but select service is higher ranked because it’s a smaller investment size,” von Dwingelo said. “You can buy with all cash and refinance in a year-and-a-half when cash flows improve and the credit market comes back. Whereas with luxury hotels, the cash required is enormous.”

The anticipated upswing in the select service segment is good news not only for the whole hotel sector, but for the commercial real estate market in its entirety, as well.

“In down economies, of the overall commercial real estate market, the hotel sector tends to go down first; businesses and leisure travelers tend to cut travel first,” von Dwingelo explained. “The hotel sector tends to lead the downturn, but on the other side, it tends to lead the recovery as the economy improves, and we’re just on the cusp of seeing those improvements.”

And within the hotel market, it is the select service segment that guides recovery, he said: “It tends to lead the entire hotel sector because it is a bit more affordable. Business travelers who used to stay at a brand’s higher-end hotels begin staying at the brand’s select-service properties; you get the same brand, the same rewards, but a lower price point.” Instead of the Marriott, for example, a business traveler might choose Courtyard by Marriott.

Given JLL Hotels’ survey conclusions, it appears things are looking up.