we choose to focus on these situations.”
Adds Fortier, “There have been a lot of
full-service properties that have been
neglected as focused service becomes the
focal point. They’re in an area or market
where they can’t be a Hilton, or a higher-
level hotel, because the PIP would be too
expensive for them,” he says. “A
DoubleTree by Hilton still would be 3. 5
stars and it’s a frame that costs less than a
Hilton full-service hotel.
“As they are,” he continues, “these
hotels are earning a 60% to 70% share of
RevPAR, so they’re low in this market, but
under the DoubleTree brand they can
move to a 100% to 110% market share.”
By Fortier’s account, several investors
have caught onto this opportunity. “We
did 31 re-flaggings to Double Tree in the
US last year, and we will do the same this
year. If you buy a small full-service prop-
erty now, you’ll be ahead of the next wave
when it comes,” he contends.
Merage sees the benefit of these properties even in the current market. “We will
entertain smaller full-service products with
a modest food and beverage operation,”
“We added
over 500
properties
last year,
we could add
600 this year
and possibly 700 in 2014.
It’s cheaper right now to
build than to buy.”
BILL FORTIER
Hilton Worldwide
he says. “These often can compete very
well in urban environments.”
Ultimately, the choice of investment type
usually comes down to the type of buyer on
the deal, says PKF’s Smith. “If you’re a large
institutional investor looking to do a
$50-million deal, then you’ll gravitate to
full service. If you’re a private equity firm or
a pension fund, then you’ll go to properties
that are $15 million to 30 million,” he says.
“There are more of those available.”
Still, it’s tough to make a bad choice in
the current market, notes Mandelbaum.
“We don’t think there are bad segments
to invest in, some just are better than oth-
ers.” Agrees Merage, “The basis and cap
rates for hotels, relative to other property
types, remain very attractive. Financing
for hotels also has become very competi-
tive; we’re seeing terms that rival what was
being done before the recession.”
Of course, the value of the asset, and
wisdom of investing, is also determined
by real estate’s most basic tenet: location,
location, location. That, and who’s doing
the investing, says Fortier.
“The big money wants to be in big city
markets, either in their downtown areas
or wherever the action is,” he says. Rate
growth there would make anyone anxious
to enter the fray, says Freitag, noting
activity in one market as an example. “If
you try to get a luxury room for $290 in
New York City, they’ll laugh you off the
island. Occupancy there is 70%, that
means seven out of every 10 rooms are
booked, on average.”
But the smaller markets have appeal for
buyers too, Fortier notes. “We’re still doing
a ton in small markets. There’s a huge
boom in the Dakotas, West Pennsylvania,
West Texas; it’s wherever there’s oil. In the
past, if we opened one hotel in North
Dakota in seven years it would be a lot,” he
notes. “Now, we can open seven hotels a
year there, if not more.”
Markets that have been on the map
before are of interest too, he says. “People
thought inventory would be dead in Miami
because of the overbuilding of condomini-
ums but now people are talking about new
development. Also, there are selective
areas on the West Coast and in the
Northeast where if you can combine retail,
office and residential property, there is
some development taking place.”
In addition, Fortier says, “we’re seeing
movement in RFP markets [i.e. cities that
are seeking to build a hotel at their conven-
tion centers]. This is happening in Miami,
Chicago just called for one and New York
City is talking about one for Manhattan.”
Smith calls out Miami, Austin and New
Orleans as hot, as well as gateway markets
such as New York, Boston, Washington,
DC and San Francisco.
Freitag also is bullish on San Francisco.
“San Francisco hasn’t seen any supply
growth and there’s nothing under construc-
tion; the market is super hot.” Meanwhile,
he adds, “Oahu is just on fire. Occupancy
there is 90% almost every single night.”
At Blackstone, hotel investment is gen-
erally done on a case-by-case basis but
some spots in Hawaii caught the firm’s
attention, notes Henritze.
“Financing
for hotels
also has
become very
competitive;
we’re seeing
terms that rival what was
being done before the
recession.”
GREG MERAGE
MIG Real Estate
“We were focused on Oahu and Waikiki
because of the very strong supply and
demand fundamentals,” he says. “As has
been reported, we are under contract to
buy the Hyatt in Waikiki, the deal likely will
close in mid-July. We plan to invest in excess
of $75 million to update rooms and com-
mon areas, and it sits on 100,000 square
feet of retail that we are evaluating.”
Hotel investors nationwide can expect
healthy profit growth for the foreseeable
future, says Mandelbaum. “The outlook is
positive. Not only is revenue growth being
driven by ADR at this point in the cycle,
which is very profitable for investors,” he
notes, “but after previous recessions we’ve
seen surges in expense growth during the
first few years of recovery as managers
replace the services and amenities cut dur-
ing recessions and bring back employees
who were cut or had their wages and/or
hours reduced.”
During this recovery though,
Mandelbaum contends, “We actually have
seen a continuation of the austerity prac-
tices of 2008 and 2009, and expense
growth has been fairly modest. It’s not
surging like after past recessions, so
there’s growth at the bottom line,” he
says. “I think technology and efficient
staffing are helping to perpetuate the
limited cost spike.”
Overall, Mandelbaum predicts, the tra-
jectory for hotels is good on a number of
fronts. “We’re expecting both rate and
revenue growth in 2015 and 2016. We will
see a slight decline in the pace of growth
in 2017, but that’s mostly due to the cycli-
cal nature of the industry,” he contends.
“The prospects are good for hotels.” ◆
