Over the next six months, 54 percent of select service hotel investors are targeting acquisitions of distressed properties as their primary investment focus, according to Jones Lang LaSalle Hotels’ bi-annual U.S. Select Service Hotel Investor Survey.
This move marks a full six percent increase since the last survey was conducted. Jones Lang LaSalle Hotels’ proprietary survey was completed by more than 300 of the nation’s top select service hotel owners and investors.
“The data from our latest survey reveals that the majority of buyers are assertively seeking opportunities to acquire assets at a discount to replacement cost,” said Al Calhoun, managing director of Jones Lang LaSalle Hotels’ select service division. “Investors expect cap rates for new acquisitions over the next six months to reach 11.5 percent, marking a 140 basis point increase from the last survey.”
Survey respondents also indicated a notable increase in ‘buy’ sentiment, up six percentage points to 44 percent, making it the dominant investor intention. “The ‘hold’ sentiment, which was the dominant sentiment in the last survey, has now declined, indicating that buyers and sellers increasingly intend to transact over the next six months,” said Calhoun.
One of the primary reasons that buyer interest is increasing is because of the drop in hotel values. Investors’ average targeted gross room revenue multiplier (GRRM) fell from 3.1x in the previous survey to its current level of 2.7x.
“Applying the decline in trailing 12-month revenue per available room (RevPAR) to the average GRRM suggests that values for properties in the mid-scale without food and beverage segment have declined by 26 percent since the June 2008 survey,” said Mark Fair, managing director of Jones Lang LaSalle Hotels’ select service division.
The extent and pace to which the market for hotel transactions improves depends on the availability of affordable debt financing. Currently, pockets of financing are available for hotels trading for $10 million and below.
“Local banks remain the most common source of acquisition financing, with 36 percent of respondents seeking funding from this source,” said Bill Grice, vice president for select service financing for Jones Lang LaSalle Hotels. Many smaller owner/operators are tapping into their existing local banking relationships and utilizing Small Business administration (SBA) funding for their acquisitions.
According to the survey, private equity capital marginally surpassed national banks as the second most popular source of financing, with 23 percent of respondents turning to this capital source, up eight percentage points from one year ago.
Sixty-four percent of select service investors anticipate further revenue per available room (RevPAR) declines over the next six months. But investors see the RevPAR turning point approaching. “Within the next year, 26 percent of respondents anticipate further RevPAR declines, while an increased 74 percent expect flat or improving RevPAR, indicative of investors’ confidence in the medium term RevPAR growth potential for the select service hotel market,” said Fair.