United States: So You Think You Want To Buy A Hotel? Well, NOW Is Probably The Time To Do It!

Last Updated: February 25 2013
Article by James Butler, Jr.

Our hotel lawyers spend a big part of their time helping clients identify and vet attractive hotel acquisition targets, and then get them under contract, run a thorough (but fast) due diligence, arrange financing and execute on the purchase. Often there is a lot of follow up work in repositioning the property or cleaning up some old problems.

But one of the perennial questions we hear from people is, "Is this a good time to buy a hotel?"

A little more than 2 years ago, my partner Guy Maisnik wrote an article on this very subject. It was called "So you think you want to buy a hotel?" That article has been one of our best-read pieces on Hotel Law Blog, and similar questions keep bouncing around. So we persuaded Guy to write an update, which continuing improvements in the hotel industry forced him to rename: "NOW is a great time to buy a hotel (and not a bad time to sell)".

NOW is a great time to buy a hotel (and not a bad time to sell)

For savvy investors, the time could be right

by Guy Maisnik | Hotel Lawyer & Vice-Chair Global Hospitality Group®

Investors, Take Note!

In January, 2011, I wrote an article titled, " So, you think you want to buy a hotel?" In it, I noted that hotel investors who delayed investment for another year or two in search of the holy grail of the bottom of the market or the "perfect" opportunity were going to be disappointed. I couldn't help but reference my Uncle Bernie who often laments about the deals he should have closed on but didn't. To his credit, Uncle Bernie closed plenty. But as he loves saying "the disappointments experienced on missed opportunities do not make my successes feel any better." So, let's recap some salient points from that article and see how they stand up today.

A parable of real estate investing tells us this: When prices are in a free fall, the average investor believes prices will keep falling. That same investor will believe prices will continue to rise when prices are rising. So in declining market transitions, the average investor will...do ...nothing. Only in hindsight, will the average investor regret his or her indecision. Savvy investors -- the 3% who know how to make money no matter which way the market is trending -- know what the rest do not: smart investment decisions do not need to be made at the bottom or top of a market.

Savvy investors buy or sell when key market indicators tell them to do so. Moreover, savvy investors know that they cannot time the market. By waiting, they know they would miss a key opportunity, and then be left scrambling like the rest of the herd. Hotel investors who delay investment for another year or two waiting for the bottom of the market will surely kick themselves. I can hear uncle Bernie's gruff old world voice saying, "I could of had that hotel for a song compared to prices today."

Well into recovery now with 5 years of projected industry improvement

Barring unforeseen circumstances, most hotel industry experts now believe we are well past the bottom the hotel cycle and into the upward inflection. For the first time in many years, there seems to be a consensus that industry fundamentals are poised to continue their improvement, driving both profitability and values, for at least another 5 years!

Here are then-and-now perspectives from our last article on this subject:

  • In 2011, we said "Hotel values per room are back to where they were in 1996, without adjusting for inflation, and HVS believes that hotel values have already increased more than 10% nationwide for 2010." Values have continued to increase over the past two years.
  • Today, Smith Travel Research reports that RevPAR growth will continue to grow at nearly 6% per year through 2014.
  • In 2011, we said "Debt financing for existing hotels is improving significantly (enhancing liquidity and value), while development and construction financing for new hotels is virtually non-existent, restraining the influx of new supply and competition for existing hotels."
  • Today, debt financing is readily available for existing hotels with good cash flow in the top 25 markets, and 10-year, fixed rate debt costs about 4% or less for them.
  • In 2011, we said: "Hotel industry fundamentals are improving from the worst collapse since the Great Depression, and look to get much stronger in second half of 2011 and are poised for double digit growth for the next three or four years."
  • Today, although demand has rebounded robustly, rates were slower to rise, and the first years of the recovery were clearly led by the luxury and upscale segments of the market. All the experts worried that the industry would be hurt by the impact uncertainty and concerns over a succession of events -- the election, fiscal cliff, frustratingly high unemployment rates, troubles in Europe, Hurricane Sandy, and slowdown in China and India. None of these negative factors seemed to affect increasing demand for hotel rooms, and hotel fundamentals are projected to continue at a strong rate through at least 2017.
  • In 2011 we talked about the significant drop in labor and materials costs since 2008, making new construction cost in certain areas feasible. According to the 2012 HVS JN+A Cost Estimating Guide, since 2009, across all markets, the cost of construction fell from 2009 to 2010.
  • Today: Since 2010 construction costs generally continue to escalate. According to the HVS Hotel Development Cost Survey, in 2011 and 2012, the price of gypsum, copper pipe, and plywood exceeded inflation. At the same time, the cost for some materials, particular lumber, remains low. No doubt those material costs will also soon increase as the housing market begins to warm.

Buy early in the hotel recovery cycle! Buy right.

It is a good time to buy a hotel almost anytime you can purchase a good hotel in a good market for less than replacement cost . . . and even more so if the hotel can service debt with its present cash flow. And with the expectation of continued improvement in industry fundamentals for 5 more years, there should be some great buys possible over the next two or three years with some interesting upside to your investment.

Buying after a long down-market cycle is always safer than jumping in at the top of the bubble after a long run up. This is the easy part. The difference for the savvy hotel investor is buying a good asset at a good time in the market cycle and doing enough due diligence. (See, Due diligence tips for your next hotel acquisition.)

Happy hunting. Don't forget to do your homework, use your checklists, and get good hotel consultants and hotel lawyers to help avoid unnecessary pitfalls.

HOW TO BUY A HOTEL -- Free handbook

Until the free handbook on HOW TO BUY A HOTEL is published (expected soon), you can access all the materials on this subject at www.HotelLawyer.com. Look on the right hand side of the home page and click on " Buying & Selling a Hotel."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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James Butler, Jr.
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