Hotel Investment Market

Renzo Maugeri
Continued economic recovery is contributing to an increase in hotel construction activity, centered primarily on renovation work as access to loan financing remains limited.

The real estate market is receiving a welcome boost from the hospitality industry, where, despite strong regional variations, the hotel sector continues to perform well, offering opportunities for inward investors, developers and operators. New York, San Francisco, Los Angeles, Houston, Chicago, Washington, D.C., and Hawaii have notably optimistic outlooks and are expected to lead the growth.

This is welcome news for travel and tourism, which is among the nation’s largest services export industries, and one of our largest employers. The industry supports more than 7.5 million travel and tourism jobs, including 1.8 million hotel property workers.

Lack of funding availability in recent years has led to a backlog of improvement works in the sector, with capital improvement programs, major renovations and routine maintenance delayed or on hold. This has become an important issue for owners, investors and operators in a climate where investment in renovation work is more viable than funding new construction.

Many cash strapped owners with substantial renovations or Property Improvement Plans (PIPs) pending are looking to sell their properties, as are lender institutions that acquired properties via defaulted loans. These form significant renovation opportunities for buyers and investors with access to funds.

Prime candidates include the new category of hotel real estate investors emerging alongside traditional owner-operators. Middle East sovereign wealth funds, notably Abu Dhabi, Qatar and Kuwait, and emerging capital investors from China, Southeast Asia, India and Latin America, are major players. The new investors are attracted by the opportunity for political, economic and currency diversification, and the hedge against inflation typically offered by hotel assets.

Many cash strapped owners with substantial renovations or Property Improvement Plans (PIPs) pending are looking to sell their properties, as are lender institutions that acquired properties via defaulted loans. These form significant renovation opportunities for buyers and investors with access to funds.

However these renovation opportunities are accompanied by new challenges, quite different from the pre-recession era. Brand compliance is a major driver right now. Property owners engaged in franchise or licence agreements with brands are once more under pressure to comply with mandatory standards. Many brands waived renovation requirements during economic downturn, but are now expecting swift implementation of overdue PIPs, to bring the property up to standard.

As a result, many hotel transactions currently come with PIPs attached – the PIP is as much a part of the investment as the purchase price – and these usually require significant expenditure to meet today’s expected hotel standards. Buyers therefore need to be aware of the full extent of deferred renovation and maintenance during purchase negotiations.

 The largest increases in visitor volumes to the U.S. in 2012 were from Japan, China and Brazil

Accompanying the change in investor profile is a change in the guest demographic. The largest increases in visitor volumes to the U.S. in 2012 were from Japan, China and Brazil [1] and each market has differing expectations. These expectations are increasingly influencing design, development and renovations, as operators consider and accommodate the preferences and behaviors of their new markets. Technology innovation has fast become an important differentiator and increasingly a means to transforming the guest experience.

 Faithful+Gould’s hospitality group helps clients achieve these goals on new builds, renovations and PIPs, with minimum disruption and lost revenue.

In the current economic climate, all investors and operators are seeking excellent value and cost control on their capital expenditure projects. Faithful+Gould’s hospitality group helps clients achieve these goals on new builds, renovations and PIPs, with minimum disruption and lost revenue. We provide cost management, project management, owner’s representation, property condition assessment, LEED sustainability consultancy and energy audits, aligning the client’s expectations and budget with the designer’s vision, to deliver great spaces for a positive guest experience. We have a rapidly growing portfolio in the hospitality, arts and leisure sector. Our hotel clients include Marriott, Wyndham, Crown Plaza, Disney®, Ritz-Carlton, Jumeirah Group, Shangri-La Group, Hilton Hotels, Intercontinental Hotel Group, Mandarin Oriental Hotel Group, Carlson Hotels, and The Hong Kong and Shanghai Hotels Limited (The Peninsula Hotels).

[1]. PwC U.S. Hotels Forecast 2013