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Hotels: The Apartments of 2011

I have a hunch and I am going to share it with you for free.

Last year, multifamily properties were sort of the darling of the industry. Credit was easy to come by thanks to Fannie, Freddie, FHA, and LifeCo appetites. Tons of deals got done and we saw cap rates compress by hundreds of basis points (Sub-5 Cap on FL apartments! What?!!).

That was last year.

My prediction for this year is that we will start to see transaction volume increase in the hospitality sector. I’m not going to distinguish between full-service and other hotel sub-types. I am just lumping all hospitality together as one and predicting an across-the-board increase in activity.

Here is why:

There are properties available. People seem to be coming to the table with realistic expectations of sales prices and several investors want to free up cash since now is such a wonderful time to buy property. If you had a b-class hotel in a gateway market that was performing, but not rolling in cash, wouldn’t you consider selling it to an investor to free up cash to chase 3 more deals? I would.

There is money available. Does anyone doubt that for the right deal you can find equity? Aren’t there like $4 Trillion in CRE equity just itching to be deployed? If there is a lack of transactions, it won’t be because of a lack of equity sources.

Fundamentals are improving. Occupancy looks better and is trending upward. So is REVPar. Business travel is increasing again (highlighting the divide between Wall St and Main St, actually). Unemployment is decreasing. All sign point to “go.”

Having said all that, I am not sure that we will see nearly the volume we saw in the MF business. There is no Fannie, Freddie, FHA platform for hotels. There is some LifeCo money, some balance sheet debt, and CMBS 2.0 doesn’t seem to hate hotels in the right markets. So, there is debt, but not like we see in MF.

Plus, there will always be a need for a place to lay your head every night. You always need a place to call home and apartments provide the cheapest option. You don’t HAVE TO travel to Milwaukee for the National Procrastinators Convention (postponed to Mid-July!). You don’t have to visit the Mississippi Obesity Awareness Foundation (All-you-can-eat buffet!). Those are optional trips that businesses and individuals can cut out as they see their prices and overhead remaining stubbornly high.

So, I don’t think we will see anywhere near the transaction volume of MF last year for hotels this year, but I do think signs are pointing upward for hospitality and they will be the investor’s darling in 2011.

I guess we will see.

– Duke

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