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December 10, 2010
In 2010, it appears that the tide may be turning for hotels. The recent bottoming of lodging operating metrics, coupled with a flurry of national transactions, suggests 2010 may have been an inflection point for the U.S. hotel sector and to some degree the Puget Sound hotel sector.
Long anticipated “green shoots” are now slowly appearing and the mood by owners and investors is much more upbeat compared to last year. Pricing spreads between buyers and sellers are narrowing. Simultaneously, the inventory of attractive opportunities remains fairly constrained given the reluctance of some lenders and others who control assets to dispose of them at today’s still somewhat depressed prices.
This is the case in the Puget Sound region, where there has not yet been a large amount of sales activity. But, is this about to change?
Across the U.S., occupancy was generally up this year over 2009, coupled with flat to some increased average daily room rates. For 2011, market watchers are anticipating growth in occupancy as well as increases in average daily room rates. One of the keys of the recovery in occupancy is that the pipeline of new construction in 2009 and 2010 slowed, with far fewer new property additions.
Broadly speaking for the Puget Sound area, the first half of 2010 was a slow start. While travelers started to return, it was not enough to overcome the previously stalled market. Further, there were still depressed average daily room rates. However, as the year moved along, room demand picked up, with many of the submarkets (downtown Seattle, the north end, south end and Eastside) showing year-over-year gains.
However, in spite of the increased amount of room demand, there is still pressure on average daily room rates, with the result being that revenue-per-available-room is flat in many submarkets. Despite this, local market participants are seeing signs there may be more demand pressure in the future, with operators once again having some pricing power.
With all of this being said, the mood for the future is optimistic. Many operators see increased bookings, and are hopeful for 2011 and beyond. As always, time will tell, and much depends on the pace and strength of the local economic recovery.
In the most recent downturn, lending for hospitality virtually came to a halt. Loans for new construction were non-existent, and refinancing was equally difficult to obtain. Relationship lending was about the only avenue available, and even then, it was very difficult to secure. However, there are signs that this is changing.
Recently, more than one national bank indicated they were interested in placing loans for certain hospitality types. The thinking of some is that it is attractive to lend into a trough market about to recover. Hospitality would fit this definition at many levels.
In the Puget Sound area during the downturn, some smaller lodging deals were able to get debt, especially if they were involved in Small Business Administration programs. However, while not like it was before the fall, debt is now becoming available in the current market for some larger deals.
Especially attractive properties in the current lending environment are those that are core assets in 24-hour cities and core markets. While debt is not plentiful, it is now becoming available in some cases. Again, this is much different from that of 12 to 18 months ago.
While not a complete list, CBRE this year tracked over 65 sales across the country with a deal size in excess of $10 million. This is much higher than the sales activity in 2009, and again shows signs of some recovery.
Local sales in 2010 include the pending transaction of the Homewood Suites on Pike Street in downtown Seattle. Chesapeake Lodging announced the deal in early November and will pay $53 million, or $271,795 per room, for the 195-unit extended-stay property. This is by far the largest transaction since the University Inn and Watertown hotels sold together for $51 million in October of 2008.
Other transactions included the Comfort Suites in Bothell, which sold for $5.2 million in June, as well as a number of smaller hotels such as the Guesthouse Suites in Renton and the Days Inn in Kent. Both of these transactions, however, were bank deals.
Last year, and even early this year, there was hope, but not any level of certainty that the tide has turned. While there are still no certain trends, all signs point to an improved year-end for 2010, and more hope for 2011 and after. Operators and investors are becoming much more active and positive, and even some lenders are returning to the market. Are we over the worst? It would seem so, but we will know more as 2011 unfolds.
Scott F. Biethan is senior managing director of CBRE Hotels.