Jones Lang LaSalle Hotels

CHICAGO, Jones Lang LaSalle Hotels reported today that the select service hotel sector in the U.S. is posed for a boom. This follows the release of the firm’s Hotel Investment Highlights – Select Service report, in which Jones Lang LaSalle Hotels estimated select service transaction volume for 2006 is on target to match a similar high to that of 2005, at an estimated $3 billion, or approximately 650 transactions.

Across the U.S., and especially in major urban gateway markets, the select service hotel market is poised for dramatic increases, based on three key market conditions.

  1. Widened gap between luxury/upscale properties and budget. “As upper tier properties reach for higher star ratings and thus higher ADR, they’ve left a gap for the lower priced properties in the mid-scale and select service sector,” said Adam McGaughy, a senior vice president for Jones Lang LaSalle Hotels Select Service Division in Chicago. “Thus, more companies are entering into key urban gateway markets with select service properties to meet this demand.” Examples include the recently converted Hilton Garden Inn and Hampton Inn in Manhattan, Four Points by Sheraton in Chicago, and SpringHill Suites Atlanta Buckhead.
  2. Functional obsolescence of first-generation prototypes. Hotel properties built in the 60s and 70s represent first generation select service prototypes. “Typically, a property such as this sits on a large piece of land but does not represent the land’s current highest and best use. They often have only a few floors of rooms that sit on 5+ acre lot of land and have outlasted their best use as a hotel,” said McGaughy.

    “Compared to today’s prototypes with a higher number of floors built for plots two acres and fewer, these properties have outlasted their “best use” as a hotel, and are being demolished for new utilization of the land or in some instances converted into other uses, such as condos or senior living. For example, recently the Ramada O’Hare, an older property, was converted to a mixed-use property with a Holiday Inn Express and office space,” McGaughy said.

  3. Conversions – “New brands, such as aloft and Hyatt Place, and prototypes, such as Fairfield Inn, Hampton Inn, Holiday Inn Express, and Residence Inns, are entering the market and often times the older prototypes are not being renewed,” said Mark von Dwingelo, a senior vice president for Jones Lang LaSalle Hotels Select Service Division.

Best 2006 Commercial Real Estate Investment: Hotels

Hotels continue to provide an exceptional counter-cyclical position, good risk diversification by asset type, strong comparative returns, and a steady annuity income stream. Hotels offer one of the best positions on the real estate cycle, having experienced the worst downturn and now firmly positioned in the growth phase, making 2006 an excellent time to invest in this asset class.

Hotels are well positioned to continue outperforming other property types over the next few years. The hotel sector maintains the most upside of the five major property types in terms of investment returns. It is the only one of the five major commercial property types in which income has outpaced appreciation in terms of total return contribution over the last year. Regarding the spread between cap rates and Treasuries, hotels are the only major property type currently trading wider than its 10.5-year long term average, and thus, using this measure, is the sector with the most upside potential.

2006 Forecast

2006 is gearing up to be another record breaking year for select service properties. “The combination of strong industry fundamentals, historically low interest rates, rising cash flows, and a strong capital market are expected to keep hotel real estate in the spotlight,” said Kristina Paider, senior vice president of marketing and research for Jones Lang LaSalle Hotels. And although the supply pipeline for select service properties is mounting, it is still relatively in check and warranted given the rapid increase in RevPAR over the past few years.

The lodging industry will continue to attract the attention of investors, seen by many investors as the real estate market sector with the most potential, bringing larger groups and new entrants into the hotel investment arena. As a result, there will be more available capital chasing less available product, driving both demand and prices higher in the year to come.

Hyatt Place, Starwood aloft and newcomer NYLO Hotels are entering into the select-service category with products that feature modern designs and tech-heavy amenities, as they contend for market share in a segment dominated by Courtyard by Marriott and Hilton Garden Inn. With the proliferation of new brands, some consolidation is expected in the next several years as conglomerates form to achieve the efficiencies of economies of scale and to gain market share in high barrier to entry markets.

“The expectation of continued improvement of fundamentals and an increasing depth of capital will stimulate a similar level of transaction volume in 2006 and into 2007,” said Al Calhoun, a managing director for Jones Lang LaSalle Hotels Select Service Division.

To receive a copy of Jones Lang LaSalle Hotels’ full research report, Hotel Investment Highlights: U.S. Select Service, or to view select service hotels currently on the market, please visit .

About Jones Lang LaSalle Hotels | Jones Lang LaSalle Hotels, the world’s leading hotel investment services firm, is uniquely positioned to provide both the depth and breadth of advice required by leading hotel companies and hotel investors globally. In 2005, Jones Lang LaSalle Hotels sold 32,049 hotel rooms to the value of US$7.9 billion in 72 cities, which represents an increase of 52% on the value of transactions in 2004. In addition advisory and valuation expertise was provided on 139,498 rooms to the value of US$31.8 billion across 265 cities. Jones Lang LaSalle Hotels adds value for clients through in depth market knowledge both in established and emerging markets, technical expertise and unrivalled experience. Their services include investment sales, mergers and acquisitions, capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection, hotel consulting, industry research and project development services. Recently recognized by Forbes Magazine, on the prestigious Platinum 400 list, Jones Lang LaSalle (NYSE: JLL), the world’s leading real estate services and investment management firm, has more than 100 offices worldwide and operates in more than 430 cities in 50 countries. www.joneslanglasallehotels.com

Kristina Paider (JLL)
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