Studies foresee a record year for hotel investment in 2015

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With its recent purchase of Strategic Hotels, the Blackstone Group added 17 hotels, including the JW Marriott Essex House on New York’s Central Park.
With its recent purchase of Strategic Hotels, the Blackstone Group added 17 hotels, including the JW Marriott Essex House on New York’s Central Park. Photo Credit: Willem van Bergen/Flickr.com

Global investors are on track to spend record amounts either buying or improving U.S. hotels this year as room demand steadily increases while new supply and interest rates remain low, according to multiple studies.

U.S. hotel capital expenditures will rise about 7%, to a record $6.4 billion, in 2015, according to a study from Bjorn Hanson, clinical professor at the NYU School of Professional Studies, Preston Robert Tisch Center for Hospitality, Tourism and Sports Management. This year will mark the fifth straight annual increase in hotel capital expenditures, which are forecasted to have surged 137% since 2010 and will be geared toward amenities like Internet bandwidth, flat-screen TVs, walk-in showers and upgrades to the food, beverage and lobby areas.

Such investments dovetail with what is also on track to be a record amount spent buying U.S. hotels in 2015. Through June, $23 billion worth of U.S. hotels changed hands, marking a 94% increase from a year earlier, according to brokerage firm Jones Lang LaSalle. That increased funding drove the average price per room for the year ended June 2015 to $241,000, up 29% from a year earlier.

Spurring that jump were investments from overseas entities, which tripled during the first half of the year. Most notably, China-based Anbang Insurance Group acquired New York’s Waldorf Astoria from Hilton Worldwide for $1.95 billion, while Qatar’s Al Faisal Holding bought the Manhattan at Times Square Hotel for $535 million.

Meanwhile, Jones Lang LaSalle reported that private-equity funds have also been more aggressive in buying U.S. hotels. That trend has continued, as the Blackstone Group last month agreed to acquire Strategic Hotels & Resorts for $3.52 billion to further boost its exposure to the upper end of the U.S. lodging market.

With Strategic Hotels, Blackstone will gain ownership of 17 high-profile hotels totaling more than 7,900 rooms. The inventory includes five Four Seasons hotels; two properties each under Marriott International’s Ritz-Carlton luxury badge, the InterContinental Hotels brand and the Fairmont brand; New York’s JW Marriott Essex House; San Francisco’s Westin St. Francis; and Southern California’s Loews Santa Monica Beach and Montage Laguna Beach hotels.

With hotel developers focusing much of their resources on select-service hotels that require less back-of-the-house real estate as well as lower staffing levels, the values of luxury hotels such as the Waldorf and the Strategic portfolio are likely to appreciate as quickly as the overall lodging sector, if not faster, according to Jan Freitag, senior vice president of lodging lnsights for the hotel research firm STR.

“People don’t build full-service boxes, and so investing in full-service hotel is the long play,” said Freitag, who declined to comment about Blackstone.

Such investors are lured by a U.S. hotel sector in which demand will likely continue to be fed by both a steady rise in group and business bookings as well as record inbound tourism numbers. PricewaterhouseCoopers said in August that U.S. hotel room occupancy will advance 1.2 percentage points this year, to a 34-year high of 65.6%, while room rates will advance 5%. And U.S. hotel room prices negotiated for corporate clients next year may rise as much as 7.5%, which would mark the largest single-year jump since 1987, NYU’s Hanson said in a separate report last week.

The Loews Santa Monica Beach, another property in the Strategic Hotels portfolio.
The Loews Santa Monica Beach, another property in the Strategic Hotels portfolio.

Whether such investments will create the type of bubble experienced by U.S. hotel owners during the most recent economic downturn remains to be seen. With a building boom feeding room inventory simultaneously with a global economic downturn, the average price per room for sold U.S. hotels was cut in half between 2006 and 2009, to about $85,000, according to Jones Lang LaSalle.

Still, with new U.S. room supply continuing to increase at less than 2% a year, both overseas investors and private equity firms remain bullish. Earlier this year, the China-based Sunshine Insurance Group agreed to pay more than $230 million, or more than $2 million a room, for the ultraluxury Baccarat Hotel New York.

Private-equity group KSL Capital Partners said last week it had raised a $2.68 billion fund that will target acquisitions in the travel and leisure sector. KSL owns Southern California’s St. Regis Monarch Beach as well as Lake Tahoe ski resorts Squaw Valley and Alpine Meadows and is the largest shareholder in British Columbia’s Whistler Blackcomb ski resort.

Blackstone’s recent moves have included taking Hilton Worldwide public in late 2013 and taking midscale hotelier La Quinta Holdings public last year. Also in 2013, Blackstone, along with Centerbridge Partners and Paulson & Co., took Extended Stay America public, and last year, it acquired Las Vegas’ 2,995-room Cosmopolitan from Deutsche Bank for $1.73 billion. That property is part of Marriott International’s Autograph Collection of independent hotels.

As for Strategic Hotels, Blackstone’s co-head of U.S. acquisitions, Tyler Henritze, called it “one of the highest-quality luxury hotel portfolios in the U.S.”

“Eventually, big meetings and large groups need to stay somewhere, and you can’t have a 400-room meeting at the breakfast bar of a select-service hotel,” said STR’s Freitag. “So it’s a smart move to invest in full-service. That’s the contrarian play right now.”

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