United States H2 2017 JLL Research Report Hotels Investment Outlook Continued low-yield environment driving renewed investor creativity
2 Hotels
Hotels the Hotels 2017 breakdown 3 It s all in the numbers Public REITs make a resounding comeback in 2017, accounting for 26.0% of hotel transaction volume Property market 0.9% 12-month occupancy growth 2.1% 12-month ADR growth 3.0% 12-month RevPAR growth 1.8% 12-month supply growth Demand Investment market $24.0 Investment sales (2017, billions of $US) -18.0% 2017 investment sales growth 7.3% Average cap rate flat 12-month change in cap rate (bps) 0.9 percent. The year marked the eight consecutive year of increases to hotel operating performance. The fourth quarter of 2017 saw an acceleration in revenue per available room growth underpinned by a healthy economy and strong corporate profits. Demand growth is outpacing supply growth at the national level. In 2018, hotel revenue per available room is expected to grow by just under 3.0 percent. International visitation into the U.S. saw a dip in 2017, in part due to the relatively strong U.S. dollar and some trepidation to visit the U.S. due in part to ongoing political rhetoric. In addition, markets that had been impacted by terrorist activities during the past several years, such as Paris, rebounded strongly in 2017 and are again posing a greater competitive alternative for global travelers vis-à-vis New York and Miami, for instance. U.S. hotel revenue per available room growth marks recent acceleration 5.0% Q4 2017 sees acceleration in operating fundamentals pushing investor confidence more positive The hotel sector is benefiting from healthy demand fundamentals in the three major sources of business corporate transient travel, group and conventions business, and leisure travel. All of these demand sources are moving in sync which is resulting in fuller hotels and operators ability to push room rates. Given growth in employment and rising household incomes, long-deferred family vacations are taking place, and travelers are spending more on hotel rooms and other activities on their trips. Hotel revenue per available room marked 3.0 percent growth in 2017. This was driven by increases to average room rates of 2.1 percent; occupancy rose by a lesser 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Full-year 2017 Q4 2017 December 2017 Source: STR Inc., JLL Research
Transactions Top transactions what s happening and where 4 Transactions decline in 2017 due to fewer high-profile portfolios Hotel transaction volume in 2017 totaled $24.0 billion. This represents an 18.0 percent decline relative to 2016, resulting from a decrease in purchases by off-shore investors and fewer portfolio transactions. Transaction activity in 2016 was bolstered by Anbang Insurance Group s purchase of 15 assets from Strategic Hotels & Resorts for approximately $5.5 billion; if this trade is excluded from the 2016 total, activity in 2017 held steady. Single-asset transactions drove the bulk of activity in 2017, accounting for over 70.0 percent of volume. Of the $17 billion of single assets that sold in 2017, 40.0 percent were situated in urban locations, a decrease from 2016 as primary markets such as New York saw a decline in liquidity. The decrease also points to investors concerns over the supply dynamics of top urban markets. Investor appetite for single assets in resort locations observed a notable increase in 2017, accounting for 24.0 percent of total single-asset volume. The state of Hawaii overtook New York as the state with the highest volume of single-asset transactions, notching $1.7 billion in sales, a 19.0 percent increase relative to 2016. Investors focus on resort markets is expected to hold strong in 2018. A factor that will hamper meaningful growth in transaction volume in 2018 is the open and active lending environment, which is boosting refinancing activities; some owners will embrace this as an alternative to selling. Notable primary market single asset hotel transactions, Q4 2017 Market Price Rooms Price per room Buyer Turtle Bay Resort Kahuku - Oahu Hawaii $332,500,000 452 $736,000 Blackstone Marriott Key Bridge Arlington Washington, D.C. $181,584,000 582 $312,000 Oaktree Capital Management, LLC Fairmont The Copley Plaza Boston Boston $170,000,000 383 $444,000 Undisclosed Ritz-Carlton Pentagon City Washington, D.C. $105,000,000 365 $288,000 Xenia Hotels & Resorts, Inc. Notable secondary market single asset hotel transactions, Q4 2017 Market Price Rooms Price per room Buyer Marriott Plano Plano $104,000,000 404 $257,000 ROCH Capital InterContinental Hotel Dallas Addison Addison Undisclosed 528 Undisclosed Columbia Sussex Corporation Hilton Indianapolis Indianapolis $82,500,000 332 $248,000 Southwest Value Partners Westin Savannah Harbor Golf Resort Savannah Savannah $77,000,000 403 $191,000 Clearview Hotel Capital, LLC Notable portfolio hotel transactions, Q4 2017 Market Price Rooms Price per room Buyer Hyatt Two-Property Phoenix Portfolio Multiple $305,000,000 612 $498,000 Xenia Hotels & Resorts, Inc. Noble Four-Property Portfolio Multiple $164,000,000 652 $252,000 Summit Hotel Properties, Inc. XSS Four-Property Portfolio Multiple $83,225,074 506 $164,000 Blackstone REIT Nana Development Two-Property Portfolio Multiple $57,500,000 302 $190,000 Undisclosed
Nashville, TN New York, NY Seattle, WA Denver, CO Dallas, TX Boston, MA Miami/Hialeah, FL Minneapolis/St Paul, MN-WI Philadelphia, PA-NJ Houston, TX Los Angeles/Long Beach, CA San Diego, CA Atlanta, GA Detroit, MI Orlando, FL Chicago, IL San Francisco/San Mateo, CA St Louis, MO-IL New Orleans, LA Tampa/St Petersburg, FL Washington, DC-MD-VA Anaheim/Santa Ana, CA Phoenix, AZ Norfolk/Virginia Beach, VA Oahu Island, HI Existing number of rooms Rooms under construction as a % of existing supply Markets Elevated new supply dampens growth in 5 major markets With 2017 representing the eight consecutive year of growth in fundamentals, growth has become more uneven and varied. A number of markets are notching stellar performance, while others are seeing a dip in operating performance due to the impact of new supply additions. Standouts include Houston and Orlando, each observing double-digit increases in revenue per available room in 2017. Houston s hotel performance was boosted by displaced residents seeking hotel accommodations following the landfall of Hurricane Harvey. Occupancy grew by a pronounced 7.1 percent, turning around performance in a market which had been under pressure for several years. Strong consumer sentiment underpinned travel to Orlando, with the market seeing nearly 5.0 percent growth in room rates and occupancy. On the flip side, hotel revenues are under pressure in a number of major markets. Driven by elevated supply deliveries, Chicago, Dallas, Minneapolis, New Orleans and Philadelphia are posting negative growth, which is resulting in more tepid underwriting and investor activity. New York saw new room additions peak at approximately 5.0 percent of existing supply in 2016. Hotel performance declines are leveling off with the market seeing just a -0.4 percent dip in revenue per available room in 2017. An Full service CBD Hotel Cap Rate Map Note: Based on JLL's Hotel Investor Sentiment Survey conducted in December 2017 3.00 4.00% 4.00 5.00% 5.00 6.00% 6.00 7.00% 7.00 8.00% 8.00 9.00% 9.00% + San Francisco CA 6.50% Seattle-Bellevue 6.90% WA OR Los Angeles 6.80% San Diego 7.00% NV Hawaii 6.30% ID AZ Phoenix 8.00% UT MT WY NM CO anomaly for the year was San Francisco, one of the top growth markets of late, which saw a dip in demand in 2017 as renovations at the Moscone Center resulted in fewer conventions taking place. That said, declines were kept at bay given the city s minimal new supply pipeline in a market where construction in other property sectors is burgeoning. Hotel supply pipeline varies greatly by market 140,000 120,000 100,000 80,000 60,000 40,000 20,000 Source: STR Inc., JLL Research Note: Data as of December 2017 TX ND SD - NE KS OK Dallas 7.70% MN Houston 8.30% existing # of rooms rooms under construction as a % of existing supply IA MO AR LA WI Chicago 7.50% IL MS IN AL MI TN KY OH Atlanta 7.50% GA FL VA NC NY NH Boston MA 6.7% New CTYork 6.30% NJ VT Washington, PA DC WV 7.00% SC Miami 7.00% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% ME
Foreign hotel volume (billions of $US) % of total hotel investment 6 Sources capital of Buyer pool driven by domestic purchasers In 2017, the U.S. hotel investment market saw a dramatic shift in the buyer pool. Following 2016 where a record 43.0 percent of volume stemmed from off-shore investors, the buyer pool was more domestically-driven in 2017. Domestic sources of capital accounted for over 80.0 percent of purchases in 2017. Public hotel real estate investment trusts notched significant growth in purchases in 2017, accounting for 26.0 percent of acquisition volume, a 23 percentage point increase relative to the group s buyer proportion in 2016. Real estate investment trusts are concentrating their acquisitions on luxury and upper upscale properties in top urban and resort locations. Private equity groups accounted for 29.0 percent of acquisitions in 2017. Foreign investment in U.S. hotels slowed in 2017 and became more diversified. As expected, capital from Mainland China decreased notably with the country s restrictions on outbound capital. The country s investment proportion dropped from 73.0 percent of off-shore investment in 2016 to 18.0 percent in 2017. At the same time, other countries in Asia, such as Japan and Korea, continued to deploy capital into the U.S. and accounted for a larger share of cross-border investment for the year. Europe also made notable investments in U.S. hotels, acquiring assets such as The Everly Hotel in Los Angeles and Pacific Beach Hotel in Honolulu. These transactions expanded Europe s share of cross-border investment in the U.S. to 28.0 percent in 2017, up from 9.0 percent in 2016. Buyer pool more domestic following record share of off-shore purchases in 2016 $14.0 Foreign hotel volume (billions of $US) 45.0% $12.0 % of total hotel volume 40.0% $10.0 35.0% 30.0% $8.0 25.0% $6.0 20.0% $4.0 15.0% 10.0% $2.0 5.0% $0.0 Source: JLL Research 2010 2011 2012 2013 2014 2015 2016 2017 0.0%
Net Balance of Responses with Regard to Hotel Performance Decrease / No Change / Increase 7 risk Sources of Demand picture improves and supply pipeline is cresting Investors have a more confident outlook as compared to one year ago, as there is more clarity around what have been the main risks to continued growth. Openings of new hotels dampened selected markets performance in 2016 and 2017. Supply risk remains top of mind; however, the construction cycle appears to be cresting. The number of hotel rooms under construction in the U.S. remained flat or declined for three consecutive months as of year-end 2017. The number of rooms under construction as of December decreased by nearly 4.0 percent when compared to the same month in 2016, marking the largest monthly decrease in six years. Slowing deliveries will bolster hotel performance as demand remains at an all-time high. Following trepidation surrounding the impact of alternative accommodations and home sharing, signs point to maturing growth in the number of home sharing listings. Disruption from shared accommodations remains relatively small in terms of the global hotel market. Cities with high hotel occupancy tend to have a higher number of home sharing listings. This reflects how home sharing sites induce travel demand in sought-after markets. It allows travelers to make a journey which was not previously possible due to low hotel room availability and high price. The industry lodging is poised to respond to these forces as cities continue to place restrictions on home sharing alternatives and hotel operators make lodging product innovation a top priority. North American Markets: Investors' Hotel Operating Performance Sentiment 80% 60% 40% 20% 0% -20% -40% -60% Investment community expresses renewed vigor -80% Short Term (Six Months) Medium Term (Two Years) Source: JLL Research
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