At least three U.S. luxury hotels are slated to sell for at least $1.3 million per room, reflecting a booming hotel-investment market spurred by a combination of continued strength in luxury travel, low interest rates and little in the way of new supply.
Leading this blue-chip trend is the Baccarat Hotel New York, which Starwood Capital will open in March, the first to carry the iconic Baccarat crystal brand. Earlier this month, Starwood Capital reached an agreement to sell the 114-room hotel to China-based Sunshine Insurance Group.
While Starwood Capital declined to confirm the price, the hotel will reportedly trade for more than $230 million, or in excess of $2 million a room for the "six-star" hotel, located across the street from the Museum of Modern Art.
Meanwhile, Hilton Worldwide this month completed its sale of New York's 1,413-room Waldorf Astoria to Beijing-based Anbang Insurance Group for $1.95 billion, or nearly $1.4 million per room. Under the agreement, Hilton will have a 100-year management contract, and the 84-year-old hotel will get a major renovation.
Across the country, Southern California's 250-room oceanfront Montage Laguna Beach was sold by Ohana Real Estate Investors to Strategic Hotels & Resorts for $360 million, or more than $1.4 million per room.
All these sales follow a year in which a record amount of single-asset hotel real estate was sold in the U.S., according to Kevin Mallory, global head of CBRE Hotels. About $22 billion worth of hotels that were not part of a broader portfolio were sold in the U.S. last year, beating prerecession highs.
Florida's St. Regis Bal Harbour, the Park Hyatt New York and Hawaii's Four Seasons Resort Hualalai were among the dozen U.S. properties that traded for at least $1 million a room in 2014.
Global hotel sales could total as much as $68 billion this year, a 15% jump from 2014 and an eight-year high, according to real estate broker Jones Lang LaSalle. Spurring such activity is increased interest in U.S. real estate from overseas financial institutions and sovereign-wealth funds.
"There's a tremendous amount of capital wanting a home, and today, the U.S. is a safe harbor," Mallory said. He estimated that about 20% of U.S. hotel investments are being financed overseas, about triple the percentage of hotel acquisitions that typically come from outside the country.
As for return on investment, the traditional rule of thumb is that a room would have to fetch $100 a night for every $100,000 spent, suggesting that a hotel trading for $1 million a room would need to average about $1,000 a night per room.
That might be the case for the Baccarat, which occupies the bottom 12 stories of a 50-floor hotel and residential project. Weekend rates in late March start at $729 a night and work their way up to $18,729 a night for the Baccarat Suite.
That said, applying such rules of thumb is impossible for top full-service hotels that operate in such rarified company. While a historically low cost of capital gives such investors a little more wiggle room, hotels that generate a relatively high percentage of their revenue from lower-margin food and beverage sales will necessarily mean a longer payback period.
Regardless, both the prospect of higher luxury demand for U.S. real estate investment trusts like Strategic Hotels and loosened regulations for China-based investors like Anbang and Sunshine Insurance will likely ensure that prices for properties like the Montage and Waldorf will continue to rise.
"The opportunity to acquire a hotel of this prominence is exceptionally rare," said Strategic Hotels CEO Raymond "Rip" Gellein, adding that there was "no competitive supply in the current pipeline as the result of extremely high barriers to entry."