Activity in large-scale U.S. hotel investment has slumped 81% over the past year, with the decline most marked in the second quarter of 2008, according to the latest report from Jones Lang LaSalle Hotels.
The report, which tracks transactions $10 million and above, showed first quarter 2008 transaction volume was US$3.4 billion, whereas the second quarter dropped to US$2.6 billion in deal closings.
“Illiquid debt markets and economic uncertainty have U.S. investors generally taking a “wait and see” approach,” said Arthur Adler, managing director and CEO-Americas for Jones Lang LaSalle Hotels. “While the drop in U.S. transaction volume is pronounced, it is not far below the volume recorded in the first half of 2004 and 2005.
The full-year 2008 U.S. volume is expected to come in somewhat below the 2004 total, in the range of $10 to $12 billion.”
Highly leveraged investors such as private equity firms bought assets worth $998 million in the first half while disposing of $1.27 billion in assets, making them net sellers. “European investors bought eight U.S. hotels in the first half of 2008, in transactions amounting to $533.6 million, indicative of foreign investors’ interest in assets in U.S. gateway markets,” said Kristina Paider, senior vice president of marketing and research for Jones Lang LaSalle Hotels.
Portfolio transactions accounted for 75% of deal volume in the first half of 2007, but decreased to 48% of transaction volume in the first six months of 2008 as the restricted debt markets made it difficult for larger transactions to get off the ground. “Individual deal size also decreased. Through mid-2008, five single asset sales exceeded the $100 million mark, down from 19 in the first half of 2007,” said Paider.
With CMBS originators in the background, balance sheet lenders such as life insurers, regional banks and pension funds are now the most active first mortgage lenders for hotel investors in the U.S. LTV ratios have shrunk and debt coverage ratios have expanded, resulting in an increase in the amount of equity required to fund a transaction and an increase in the weighted average cost of capital. This, combined with the weakening industry fundamentals has placed upward pressure on capitalization rates.
“Nevertheless, as evidenced by the successful execution of several high quality deals, the markets are indeed open and appetite remains among lenders for well-sponsored assets in good locations,” said Adler.