Wednesday, July 6, 2011

Evaluating Hotels For Investment In A Surging Hospitality Market

The hospitality industry is a breed in and of itself. Oddly, we have one promiment colleague here in Central Ohio (not in my brokerage) who categorizes hotels as a multi-unit housing product.

They are not.

Hotels resemble multifamily in only one distinct characteristic. True, they both are comprised of multiple dwelling units in a single building. From there, everything else changes. A huge difference is that where apartment dwellers sign typically a one-year lease, hotel room guests sign a one-day lease. Or a lease for multiple days.

But when evaluating hotels for investment, today it is about 1) Condition; and 2) Current financials and the ability to re-position for a better occupancy and monetary return. Sure, there are other factors, such as zoning possibilities in case there is an alternate highest and best use, and proximity to other services and businesses.

Some hotels have alternate uses, such as conversion to senior housing or student housing, or conversion to apartments. In Florida, I have seen small, older hotels converted to condominiums. Here in Columbus, The Ohio State University a couple of years ago purchased a busy campus-area Holiday Inn (which had a pretty decent occupancy rate and was party central on football Saturdays) and converted it to student housing apartments. Much to the lasting chagrin of die-hard Buckeye fans. But I digress...

A huge difference between hotels and other real estate investments is that an average 60-70 percent occupancy rate is a place where you are typically already making money. Not so with other investment real estate. If you are sitting at 60 percent occupancy with other CRE categories -- industrial, multifamily, retail, office, etc. -- you have problems.

Recently a colleague came to me with a listing opportunity and asked me my opinion because the seller did not want to share any financials, but had an asking price she insisted be used. My question: How did the seller come up with that number? The answer: I think they owe a lot of money to someone. Fine, but as with ANY investment property type, what the seller owes to anyone does not dictate the value of a property. In particular, investment properties. Then I asked him why he wanted to take the listing if the seller wasn't going to be cooperative. When evaluating a hospitality property, all of these factors come into play.

And why even bring this up? Because interest in hotels is surging. Group rates are up and REITs are dominating the acquisition market. But, as Globe Street news notes, there is still a lot of opportunity out there for the savvy buyer, if they can dig deep. Luxury is coming back strong and big brands are doubling down on their efforts. Stagnant employment has raised some red flags, but projections are looking up in this previously struggling sector as assets are turning around fast.

In our market, several new hotels are being constructed. Two of them are on ground that previously housed other types of real estate -- one on the former site of a large restaurant/banquet facility, the second on a mixed-use entertainment redevelopment site previously home to a massive grocery warehouse complex that once covered 90 acres.

No matter the hotel type, the same evaluation factors apply to flagged brands, or independent or boutique facilities. Buyers are looking at condition, location, factors impacting an upside plan, government regulations, and the general economy and employment conditions in a given area.

Sellers need to understand this and be realistic about their pricing. And listen to the counsel of their commercial real estate broker. For our job is not to make someone feel good about the number they pull out of the air, but to share with them the reality of the situation so that they may make the very best decisions about their investment property dispositions.

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