U.S. Hotel Transactions Down; Pickup Expected
Jones Lang LaSalle Reports
Portfolio deals marked the most dramatic decline, down 88% to US$3.8 billion in 2008. Difficulty in obtaining financing also caused the average single-asset transaction size to decrease by 20%.
“Private REITs were the largest buyer of hotel assets during 2008. While overall U.S. transaction volume dropped by 81% in 2008, private REITs’ investment in hotels actually increased by one third,” says Tom Fisher, a managing director for Jones Lang LaSalle Hotels. Institutional investors and owner/operators were also among the more active buyers during 2008. Highly leveraged buyers moved to the sidelines in 2008.
“Private equity groups, having invested nearly US$50 billion in U.S. hotel real estate from 2005 to 2007, were net sellers during 2008. We do not expect them to re-emerge as active buyers in the near term until operating fundamentals stabilize and liquidity improves,” Fisher says.
As access to credit remains exigent, alternative lenders have emerged for both senior and mezzanine lending given the favorable risk-adjusted returns that can be achieved. These alternative lenders will include institutional investors, private equity funds and some REITs who will exploit the opportunity to achieve favorable risk-adjusted returns by participating in the more senior tranches of the capital stack and earn wide spreads to treasury rates.
Transactions are expected to pick up later in 2009 as owners face more distress due to cash flow shortfalls or as loans reach maturity. “As lenders increasingly take control of assets, they will sell some hotels as liquidity increases. Government intervention will likely cause loans to be written down, which will allow lenders to sell at current market values. Furthermore, investors will increasingly dispose of assets as the gap between sellers’ expectations and investors’ view of value narrows,” Adler says.