For well over a decade, members of the hotel industry’s preeminent think tank, the Lodging Industry Investment Council, are annually surveyed to develop a list of the major hotel investment opportunities and challenges for the coming year.
This exhaustive survey results in the LIIC Top 10, a highly regarded profile of investment sentiment and attitudes for the lodging industry for the forthcoming 12 months. Altogether, the members of LIIC represent direct acquisition and disposition control of well over $40 billion of lodging real estate.
Members are highly active and have the pulse of the market, with 45 percent of LIIC hotel investors having successfully purchased a hotel in the last 12 months and an additional 16 percent having made offers but not been the winner. Moreover, 76 percent plan to sell a hotel over the next 24 months.
The hospitality industry’s most influential investors, lenders, corporate real estate executives, real estate investment trusts, public hotel companies, brokers and significant lodging equity sources are represented on the council. LIIC serves as the leading industry think tank for the lodging business (www.liic.org).
2017 Top 10 LIIC survey results:
- Hotel real estate: Forecasting clear skies with some clouds and slightly cooling temperatures. Overall, the 2017 LIIC Survey is more positive than 2016 and starkly different than the peak year survey in 2015. Responses reveal a calmness compared with widespread nervousness in April 2016. Chinese investment is expected (36 percent) to slow slightly and Brexit’s impact on U.S. hotels is considered slight. Private equity followed by listed REITs are predicted to dominate the purchase of upscale to luxury hotels, while regional owner-operators are projected to dominate the purchase of economy to upper midscale hotels.
- Movement in the hotel real estate cycle? Most investors (68 percent) believe we are still in the extra innings of the current cycle, which began in 2009; however, an astute, highly intelligent minority (32 percent) believe we have begun a new cycle. Projections for the U.S. economy are positive, with 60 percent forecasting gross domestic product growth averaging greater than 2 percent over the next 24 months.
- Asset pricing bid/ask settles, values flat to maybe increasing.Over the next 12 months, 54 percent project that lodging real estate values will be flat in comparison to 2016. However, a sizable group (36 percent) forecast a slight increase in values (up to 5 percent). The favorite investment target is upper upscale lodging properties.
- 2017’s greatest threats to hotel investment? The top three threats on the horizon are
- New lodging supply: 90 percent of LIIC members cited new hotel supply as the current and dominant top investment concern. Hypocritically, 81 percent are building new lodging assets.
- Increasing interest rates: With interest rates increasing gradually up to 100 bps over the next 12 months, sellers need to understand the impact on asset pricing for hotels they are looking to sell.
- Government mandated minimum wage increases: Investors (28 percent; down from last year) are threatened by government mandated minimum wage increases and the corresponding impact on hotel operating costs (74 percent anticipate a gradual negative impact over the next five years).
- Hotel transaction market continues slight cooling. Fifty-two percent of responders forecast the total dollar volume of U.S. hotel transactions in calendar 2017 will be down relative to year-end 2016 and 22 percent believe volume will be flat. Similarly, 46 percent believe the number of assets sold to be down, while 32 percent anticipate the number of assets sold to be flat.
- Hotel debt available, yet less favorable. Hotel investors are “debt-leery,” causing 56 percent to seek refinancing of existing debt over the coming year even though 52 percent believe the optimum refinance window closed in the last six months. Owners have more concern with interest rate increases on senior debt than lenders’ available leverage percentages.
- Lodging development marches along. Investor attitude stays positive on the concept of building new lodging properties. As to developing hotels, 66 percent of LIIC responded, “Yes, if you are selective about product and markets.” Respondents are putting their money behind their votes, with 81 percent of relevant LIIC members having new hotels actively under development.
- Want to buy a hotel? Quantity and quality: Forty-two percent of investors believe that a “below-average quantity” of hotels are available for purchase, closely followed by 44 percent at “average quantity.” Fifty-two percent believe the quality is average and 28 percent suggest negatively “slightly worse than 2016.”
- Markets not to invest in. LIIC members were asked which of the top 25 markets in which they “would not consider buying a hotel.” Responses were: a. Houston (64 percent), b. Nashville (32 percent), c. Detroit (28 percent), d. New York (28 percent) and St. Louis (28 percent). Sleeper – where to buy? New Orleans! Not one vote against recorded.
- Marriott and Starwood merger? If you own a Starwood-branded hotel, 36 percent surprisingly believe the value of Starwood lodging investments have increased specifically due to the merger. On the other hand, the primary concern (22 percent) stressing hotel owners is decreasing negotiating leverage with mega-Marriott going forward
LIIC Bonus Questions: Looking forward, the “hotel investment illuminati” predict:
- Buyers paying package (5 or more hotels) premium? Maybe not anymore; 53 percent say no and 47 percent yes.
- Congrats to the 13 percent of LIIC members who last year predicted the Trump presidential victory. Interestingly, 44 percent now say the Trump Administration is positively affecting hotel ownership.
- When staying at a hotel on a multiple-day business trip, LIIC’s greatest “pet peeves” are: 1. painfully slow internet; 2. uncomfortable bedding; and 3. noise (hallways, packaged terminal air conditioners and outside traffic). Other “peeves” include paparazzi, breakfast not starting early enough and the cost of items in the snack shop being too expensive.
Cahill is co-chairman of the LIIC and produced this year’s survey. Nate Shartar and Alexander Cammarata, associates in HREC’s Denver office, assisted throughout the process.