Premier-branded single asset hotels are now the top investment choice for select service hotel investors, according to Jones Lang LaSalle Hotels bi-annual U.S. Select Service Hotel Investor Survey.
Premier-branded single asset hotels are now the top investment choice for select service hotel investors, according to Jones Lang LaSalle Hotels’ bi-annual U.S. Select Service Hotel Investor Survey. More than half of all investors surveyed say they’re targeting top brands on a one-off basis, while another third pick both portfolios and single assets as their top draw. The survey also indicated the transaction market will remain active in the months ahead as a third of respondents indicated a strong “buy” sentiment. Other survey highlights include:
• Capitalization rates anticipated to average 8.6 percent in 2012, down from 9.0 percent in previous survey • Private equity funds fuel acquisition market with 35 percent of transaction volume • Three-quarters of investors will attempt to refinance maturing loans
Optimistic on operational performance
Investors are eager to continue to ride the up-cycle of stability and growth in lodging fundamentals. More than half of survey respondents say the outlook for RevPAR growth in their select service portfolios remains assured with increases of two to five percent in 2012 over 2011. Nearly a quarter of investors expect secondary markets to capture more than a five percent increase in RevPAR growth. Target capitalization rates for select service acquisitions over the next six months average 8.6 percent, a decrease of 40 basis points since December 2011 rates. Urban select service assets continue to garner the most interest from investors, and the cap rate spreads between select service and full service assets in urban, core markets continues to converge.
“We expect cap rates to funnel downward as operational performance bulks up. Investors are still focused on expanding their portfolios to gain a foothold in markets that exhibit RevPAR growth,” said Al Calhoun, Managing Director of Jones Lang LaSalle Hotels. “The hotel investment climate is continuing to gain traction, leading to a more buoyant transaction market.”
Private equity makes a play for select service acquisitions
A wide audience of cash rich buyers is emerging, as capital availability in the marketplace continues to grow. Private equity funds have taken the wheel as the market leader with 35 percent of the total select service transaction volume, while REITs pulled back and stand in second place at 31 percent. The investment internal rate of return (IRR) required to consummate a transaction declined slightly from the previous survey, indicative of reduced risk profile and lesser constraints on capital markets compared to the second half of 2011. The highest proportion of respondents, 27 percent, indicated targeting a leveraged IRR of 15-17 percent for select service acquisitions over the next six months.
“The wave of equity hitting the select service market is due in large part to a sustained recovery in the debt markets and the lower cost of capital. Over the next six to 12 months, we expect private equity funds to remain at the forefront of select service investment,” added Mark Fair, Managing Director of Jones Lang LaSalle Hotels. “Premier branded assets are a draw for investors looking to widen and differentiate their portfolio in both primary and secondary markets with assets that perform with an above par rate of return.”
Refinancing reigns supreme
The strengthening debt markets are providing sustainable solutions for investors addressing their upcoming loan maturities. Nearly 70 percent of investors believe debt is readily available for select service investments and three-quarters of respondents indicated they plan to refinance their maturing loans. Local and regional banks remain the most common source of financing requests for select service hotels, followed by national banks and private equity funds.
“Financing options for top performing hotels located in strong markets continue to be robust. The majority of lenders have witnessed operating performance improve significantly for loans on their balance sheets and continue to seek out lending opportunities,” added Bill Grice, Senior Vice President of Jones Lang LaSalle Hotels. “The ability to achieve higher leverage has returned to some extent; however the property’s fundamentals must still support more aggressive underwriting.”
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