GlobalHotelNetwork.com: Where do you see the best opportunities for hotel investment or development?
Chad Crandell: With one third of 2019 now “in the books”, the U.S economy continues to grow, albeit at a slower pace with GDP forecast around 2.5% for the year. This slower growth is having an impact on hotel investment, with transaction activity down as compared to same time last year.
Our clients continue to pursue hotel investment opportunities for full-service hotels in major metro markets along the coasts, as a priority, with many investors seeking to further diversify holding within the lifestyle segment.
South Florida and Manhattan continue to be key markets on the east coast, with California and Hawaii being target markets on the west coast.
In addition to major metro markets, destination resorts are also highly sought out. Resort markets continue to perform at high levels in the U.S., and barriers to entry in many resort destinations has kept supply in check, a very attractive criterion for many hotel investors.
Cap rates appear steady, and the anticipated continued rise in interest rates seems on hold, at least for the present time. The constant challenge to increased transaction activity is the spread between buyers bid, and sellers ask. The slowdown in RevPAR growth, compounded with rising expenses is exasperating this dynamic.
We continue to see a lot of interest in hotel development, even at this stage of the economic cycle. In our own asset management portfolio, we are currently representing investors on over a dozen development projects in the pipeline. These projects run the spectrum from conversion of a historic office building to an urban lifestyle/soft branded hotel, to a public-private headquarter convention center hotel, both of which have scheduled openings in 2019. In addition, we are seeing a number of lifestyle boutique hotels being developed in secondary markets, along with mixed- use residential/hotel in select resort markets. However, as has been reported, it does appear we have peaked out in the supply cycle in 2018 at 2.0%, with new supply in 2019-2020 expected to taper off. As the U.S. continues to experience record low unemployment and an active construction cycle among all real estate classes, rising construction costs, in many markets at double digit growth, are beginning to cool off the underwriting of new projects. As an aside, construction of premium branded select-service hotels continues unabated in many markets throughout the country. Many of the major hotel chains have perpetuated this cycle, with the prolific introduction of new brands to encourage this development activity.
We continue to see extremely strong demand for asset management, primarily from equity and family office clients with strong interest in placing capital. Interestingly, we are also seeing interest from groups that have an internal asset management function, including equity groups and REITs, who are looking to strengthen their bench and develop industry best practices from third-party experts. While lodging continues to sustain attractive returns as compared to other asset classes, clients recognize the value that asset managers bring, particularly at this stage of the cycle to optimize value and cash on cash returns while the market is still performing, while also developing contingency strategies for the anticipated “blimp” in many markets within the next 12 to 18 months. For both, lodging acquisitions and development projects, particularly given where we stand in this long cycle, experience and underwriting expertise, including a wide range of sensitivity scenarios will be critical for evaluating opportunities.