Hotel Investors Must Act Defensive in 2002 While Positioning For Recovery

To be successful in 2002, hotel investors must balance a defensive stance in the current economic downturn with a forward-looking approach to recovery, according to Jones Lang LaSalle Hotels` Hotel Investment Strategy Annual. Co-authored with LaSalle Investment Management, the Hotel Investment Strategy Annual is a visionary report that provides macro themes on global hotel real estate investing for the year ahead.

Researchers believe that the wide world of hotel real estate investing will grow wider in the future as new markets begin to open up in China, Central and Eastern Europe, and Latin America. However, given the 2002 global economic slowdown, many investors will need to focus on their domestic markets and adapt a more defensive approach.

“As a result, we believe that cross-border equity will be scarcer in 2002,” said Arthur Adler, Managing Director and CEO-Americas, of Jones Lang LaSalle Hotels. “Investors who can take advantage of these capital shortages will do very well in markets that are starved for equity and where low-cost debt is available.”

According to Melinda McKay, Senior Vice President of Jones Lang LaSalle Hotels, it is paramount that hotel investors consider certain changes in 2002. “Investors must balance the rapidly decelerating world economy, a once-in-30-years` opportunity to borrow at low rates relative to hotel yields and the rapid rise and fall of risk tolerance in the asset markets when developing their hotel real estate investment strategies for the coming year.”

Drawing on a global network of research professionals, the Hotel Investment Strategy Annual provides a region-by-region analysis of real estate markets. Key findings include:


- U.S. hotel markets are much better positioned than in past recessions, and high-income yields and relative stability will attract continued investor interest. With regard to investment opportunities, all major markets will post a recovery in 2002, therefore, investors who have focused on underlying asset values and not on existing cashflow anomalies will benefit. Counter-cyclical investors who acquire properties in the current trough have the potential to enjoy significant capital gain by disposing of properties in the market recovery phase. Those cities expected to enjoy the most significant turn-around include Boston, Chicago, Los Angeles, Orlando and Atlanta.

- Today, a reasonable prospect exists that Europe`s economy will outperform the United States in both 2001 and 2002. Thus in turn, Europe`s hotel markets stand to show stronger growth levels in 2002 than their U.S. counterparts; however, the European hotel market will produce a mixed performance in 2002. Prudent investors will have to pick their market exposure more carefully than ever. Transaction activity in 2002 is apt to be similar to 2001, possibly showing a slight increase in single-asset transactions.
- In the Asia Pacific, the economic recovery that occurred post the 1997-1998 crisis faltered during 2001 as most Asian economies felt the effects of the global economic slowdown. However, the standout economies of Australia, China and India have remained relatively unaffected and continue to post economic growth. In this region, opportunities for investors should emerge; however, markets vary greatly in terms of availability of debt, treatment of non-performing loans and vendors` price expectations. These factors impact on the feasibility of hotel acquisition and development in the region.

According to Jones Lang LaSalle Hotels, regarding hotel investment opportunities in 2002, those markets with the strongest buy rating are Houston, Los Angeles, San Francisco and Toronto. Markets rated as “those to watch” include Atlanta, Buenos Aires, Miami, Orlando, Rio de Janiero and Sao Paulo.

In 2002, the forecast average price per room for hotel transactions is $120,000 per room, down from 2001, but equal to 2000 levels. Transaction volume is expected to rebound from sinking 2001 levels—just below the $6 billion volume of trading posted in 2000.

Currently, the most dramatic declines in revenue per available room (RevPAR) are seen in Sao Paulo, Buenos Aires, Cancun, Honolulu, New York and the Caribbean. Within the next 12 months, the RevPAR decline of Sao Paulo and Buenos Aires will not be as rapid; however, Honolulu, Cancun, New York and the Caribbean will begin to experience a rise in RevPAR. In the United States, Boston, Chicago, Dallas and Los Angeles are anticipated to experience the highest levels of increasing RevPAR over the next 12 months. Overall, the Canadian markets of Montreal, Toronto and Vancouver are expected to post the highest levels of RevPAR growth in 2002 throughout the Americas.

Finally, according to Jones Lang LaSalle`s Regional Economic Growth Indices (REGI), Washington, D.C. received a rating of one—the best possible rating—in terms of forecasted economic health of prime property markets for 2002. Phoenix and Atlanta received ratings of two and three respectively. Honolulu and New York posted the worst ratings of those markets measured at 148 and 124 respectively. The REGI provides a leading indicator of the economic strength of over 150 metropolitan areas throughout the United States.