Hotel Cap Rates Hold Steady - Values Under Pressure
By Suzanne R. Mellen, Senior Managing Director - Practice Leader, San Francisco at HVS
Following a year of robust transaction activity, hotel capitalization rates remain stable, while hotel NOI and values are under pressure due to slowing RevPAR growth and increasing operating expenses. This article looks at hotel sales and capitalization rate trends, the impact of slowing RevPAR growth on hotel values, and the outlook for 2019. 
Hotel owners and investors took advantage of the market's optimism, with 2018 turning out to be a robust year of transaction activity. The lodging sector attracted greater interest from investors looking for higher returns, and existing owners availed themselves of improved market conditions to strategically fine-tune their portfolios. According to preliminary data generated by RCA, single-asset and portfolio hotel sales transaction volume soared, increasing by a whopping 47% to $41.0 billion (from $27.8 billion in 2017), recording the second-highest volume in the last decade, though still well below the $50 million achieved in 2015.
The average price per key for all sales (price of $2.5 million and over) increased by 21% from $127,000 in 2017 to $153,000 in 2018, driven by the sale of a greater number of larger, higher-priced hotels. Total volume for hotels that sold for $10 million and over (major hotel sales) increased by a substantial 56%, while the number of hotels that sold in this price category increased by only 6%, reflecting that larger, higher-priced deals drove the volume increase. The average price per key increased by 24%, from $221,000 to $274,000.
Individual property sales volume increased by a modest 3.8%. The volume of portfolio transactions, defined by RCA as the sale of two or more hotels, increased by 220%, from $3.9 billion in 2017 to $12.5 billion in 2018. A greater number of large, high-priced deals also drove up sales volume; five hotels transacted at prices exceeding $500 million, including the Plaza in NYC that sold for $600 million ($2.6 million per key), as well as two Waldorf Astoria resorts, the Grand Wailea that sold for $1.1 billion ($1,312,000 per key) and the Boca Raton Resort and Club that sold for $1 billion ($955,000 per key). The Grand Wailea was one of a three-hotel portfolio that sold for $1.06 billion. Pebblebrook's acquisition of LaSalle in the 4th quarter for $4.4 billion was the year's only entity transaction.