Caution Mixes with Optimism in 'Select' Hotel Industry

MBA (9/29/2008 ) Murray, Michael
Deals for select service hotels in the United States continue to close despite capital market turmoil and economic uncertainty, said Chicago-based Jones Lang LaSalle Hotels.
U.S. select service hotels tend to be more economical and suited more for a budget-conscious traveler and, based on the survey, select service hotel buyers outnumber sellers by 4 to 1, according to JLL's hotel investor survey. Despite more conservative underwriting standards, 75 percent of investors in the survey target mid-market and upper mid-market brands for investment in the next six months.

“While the debt markets remain far less active than 18 months ago, lenders, particularly regional and community banks, remain receptive to financings under $20 million,” said Adam McGaughy, executive vice president for Jones Lang LaSalle Hotels.

Jim Butler, chairman of global hospitality at the Los Angeles law office Jeffer Mangels Butler & Marmaro LLP and author of www.HotelLawBlog.com, said the attitude at this year's Phoenix Lodging Conference reflects mostly caution.

"The optimists are cautious and hope for a quick fix of the economy with a turnaround in 12-18 months," Butler said. "The pessimists think this could be a four to five year downturn or something of major proportions, like 1988 or 1989."

Mark Woodworth president of PKF Hospitality Research, Atlanta, said airline capacity cuts would hinder travel in 2009, capital market turmoil would continue to pause new construction until 2010 and supply and demand imbalance would drag rate growth until a 2010 recovery.

Despite higher oil costs, less travelling and a supply and demand imbalance, Woodworth also said the downturn in the hotel industry would be the mildest in 20 years.

However, Standard & Poor's, New York, lowered its outlook on Friday for Starwood Hotels & Resorts Worldwide Inc. from stable to negative—a BBB- corporate credit rating on Starwood.

"The negative outlook revision reflects prospects for an extended economic slowdown in the U.S. that is likely to cause U.S. industry revenue per available room [RevPAR] to be flat to down slightly in 2008, and to decline up to 5 percent in 2009," said Emile Courtney, credit analyst at S&P.

McGaughy said nearly 37 percent of U.S. select service hotel investors surveyed said they intend to buy during the next six months, but they have less interest in larger select service portfolios because of difficulty in securing financing.

“For more than 70 percent of select service investors, balance sheet lenders such as local and national banks and finance/insurance companies are now the dominant sources of funding,” said Mark von Dwingelo, senior vice president for Jones Lang LaSalle Hotels.

Von Dwingelo said a 5.5 percent investor increase in targeting select-service hotels for northeastern U.S. was based on greater supply constraint and strong demand fundamentals. Investor interest also increased in the mid-atlantic and southwest U.S., primarily Dallas, Houston, Phoenix and Denver.

“Each of these markets provides significant opportunities to replace older product and ‘up’ flag to a more premium select service brand,” von Dwingelo said.

Expectations for select service hotel operating performance during the next six to 12 months declined, but a two-year investor outlook increased from the survey six months ago, which McGaughy called “particularly optimistic.”

“Given the lack of quality assets available for sale, now is a good time to bring quality product to the market,” McGaughy said.