Select Service Hotel Investor Outlook for Next Six to 12 Months Marks Improvement
Cap rates to compress over next six months; asset value declines cease according to Jones Lang LaSalle Hotels’ survey
12 April 2010
For the first time in more than two years, select service investor sentiment has turned a corner and marked improvement, according to Jones Lang LaSalle Hotels’ bi-annual U.S. Select Service Hotel Investor Survey. Over the next six months, 53 percent of respondents anticipate flat or increasing RevPAR. That outlook improves over the next 12 months to 85 percent of respondents. Jones Lang LaSalle Hotels’ proprietary survey was completed by nearly 300 of the nation’s top select service hotel owners and investors.
“The data from our latest survey reveals that investors across the board have a more favorable outlook for the select service hotel investment sector,” said Mark Fair, managing director of Jones Lang LaSalle Hotels’ select service division. “For the first time following several consecutive increases, investors expect cap rates for new acquisitions over the next six months to contract to 10.8 percent, marking a 70 basis point decrease from the last survey.”
According to the survey, investors’ ‘buy’ sentiment has continued its upward momentum, increasing by seven percentage points over the past year. More than 60 percent of investors are aggressively targeting distressed assets as their first choice for investment. Many investors feel it is a favorable time to buy at a discount to properties’ intrinsic values.
“Metrics like price per key and discount to replacement cost are compelling motivators for investors today,” said Fair.
Asset value declines level off
According to metrics obtained in the survey, average select service asset values—having declined in the past two surveys by 10.8 and 18.6 percent, respectively—have remained steady over the past six months, providing welcome news for investors after the wave of significant decreases in value.
“While RevPAR continues to decline, respondents in this survey indicated a 0.2x gain in Gross Room Revenue Multipliers (GRRMs) that they are willing to apply to valuations, which has helped to keep asset values from declining further,” said Mark von Dwingelo, senior vice president with Jones Lang LaSalle Hotels’ select service division.
Plenty of equity
Debt financing remains constrained, but many investors are flush with equity. All-cash transactions are increasingly prevalent in today’s market. For many sellers, the buyer’s ability to fund the transaction has become more important than pricing levels. “Until financing becomes more readily available, all-cash offers without financing contingencies will be placed on the top of sellers’ lists,” said Bill Grice, vice president for select service financing for Jones Lang LaSalle Hotels.
Brighter performance outlook
Compared to the survey conducted six months ago, investors have a more positive outlook for select service hotel RevPAR. Over the next six months, 12 percent of investors expect RevPAR to improve in year-over-year comparisons, and 41 percent anticipate flat performance. Forty-seven percent of respondents anticipate continued RevPAR softening over the next six months, but this marks a decrease from 64 percent in the last survey. “Over the next year, 85 percent of respondents anticipate flat or increasing RevPAR, indicative of investors’ confidence in the medium term RevPAR growth potential for the select service hotel market,” said Fair.