On a national basis, the hotel industry has been showing significantly increased activity in 2013. Research from several of the largest real estate investment services firms has shown a 29 percent increase in transaction volume and a 55 percent increase in sales value over the same period in 2012.
Three factors have driven this process:
- A three-year steady increase in leisure and corporate travel since the industry began its recovery in 2010. Current occupancy rates show more consistency but slightly less growth over 2012.
- Based on the ADRs (average daily rates), revenues continue to increase at a strong pace and overall industry revenues are very positive. The outlook is quite bright for the rest of 2013 and 2014.
- A resurgence of financing and refinancing, just as we’ve seen across every other sector of the commercial real estate world. Interest rates in the 4-5 percent range have helped lock in much lower overhead expenses and increased profitability substantially for many hotel owners and operators.
These trends have actually been even stronger here in our home state, particularly the Seattle market where RevPar (revenue per available room) has increased in the 9 percent range, according the Washington Lodging Associations June report.
In a recent conversation we had with Rick Takach, Jr. CEO of Vesta Hospitality, he confirmed that he has seen strengthening revenues, and has been pleased with the results this year. He also sounded the warning that he has seen the flow of capital dollars into the industry and as a result will start to push up the purchase prices.
Not all the action is in large cities or high-end hotels. We’ve seen some activity here in Southwest Washington. In April, 2012, the 91-room Holiday Inn Express, Vancouver Mall sold for $6.7 million on 1.52 acres of land. In August, 2012 the 63-room Roadway Inn by Van Mall sold for $2,050,000. Just last month, the Best Western Hotel, Vancouver sold for $4.5 million on 1.75 acres of land.
While key indicators and hotel performances are back to pre-recession peaks, supply growth is low and we have seen minimal activity in the building of new hotels in the area. This may be starting to change as we’ve seen a few stories about potential hotel developments out on the east side along 192nd avenue, and along Mill Plain Boulevard.
Inside the purchase of a hotel
Hotels can offer higher investment yields. Currently, the market in a macro environment is seeing an average cap rate of 7.8 percent, which is an estimated two percentage points higher when compared to other commercial real estate asset classes. When a buyer performs their analysis of a prospective hotel purchase, the cap rate is one of the main ingredients. The cap rate is the NOI (net operating income) divided by the purchase price.
During a buyer’s due diligence, a scrutinizing look at the seller’s last three years of their profits and losses and a comparison to the hotel’s property management system is done. The hotels front office systems reports include the monthly room rates and total occupancies that make up the large part of the hotels revenues. All data is reviewed and verified so that the total hotel operation can be substantiated to match the potential purchase price. Many other factors are analyzed as well: financing options; current economic trends; the hotel’s competitive set; demand generators; new and existing corporate business; percentages of customer/guest mix; capital improvements needed or already done; franchise agreements; franchisor approvals; etc. If bank financing is a major component of the purchase, a professional appraisal and/or site analysis is performed.