Current owner-operator buyers seem to be much more prepared than in the past; they have a plan

Earle Wason, Wason Associates Hospitality

recently attended the opening of the new Marriott Courtyard in Littleton, Mass. I called about three days in advance to reserve a room for the night and was told it was “sold out”. The hotel was developed and operated by LaFrance Hospitality a rapidly expanding regional hotel company based in Westport, Mass. I later learned that even the company president could not get a room. I then called one of my clients who owns the Radisson Hotel in Chelmsford. He was able to get me the last available room, a three room suite and big enough to have a party for about 30 people, the hotel was sold out and it was all he had so I took it. This seems to be a common story in our current market, the hotel business in New England is still very active. As to the new Marriott Courtyard, it is absolutely beautiful, offers a very contemporary décor and rooms that would make the Ritz-Carltons of not too many years ago look ordinary.

The level of activity and demand from prospective buyers for hotels is now having a major impact on the sale of hotels throughout New England. There are many buyers chasing too few opportunities; therefore more companies look to build. We are seeing an increase in construction which is good but the cost per room for the new properties has increased dramatically. The effect of this will be fun to watch and has already manifested itself in a number of sales through New England. As the cost of new construction has risen and older mid-market franchise hotels have become available for sale there is a definite increase in sales prices over the past few years. Buyers are looking at these opportunities as “value added” opportunities. They plan on completing fairly expensive PIP requirements to increase the quality of the hotel and then design a plan to more effectively operate and market the hotel. The key is the “all in” price on a per room basis which is likely to be much lower than the newly constructed hotel. If remodeled properly this new hotel opportunity can acquire a room rate not far below the new hotel and at much less capital cost.

The new construction of quality hotels and the remodeling of the slightly older 3-story and larger interior corridor hotels is continuing to have a negative impact on the older two story interior corridor hotels and exterior corridor hotels. What I continue to hear is “If I purchase this hotel what will be my exit strategy?” Sometimes as a broker that can be a very tough question. For these transactions we like to look at the acreage included with the sale and what future use and value could be achieved: is it located in a “barriers to entry market”; has it been improved or could be improved to extend the life of the hotel; and does a 10 or 15 year amortization of the loan work better and not affect the market capitalization rate at purchase. These issues are very common when in an expanding economy and the result is likely fairly clear.

In the March 4, 2016 issue of the New England Real Estate Journal my article "Two factors affecting New Hampshire's hospitality industry" I discussed the change in the owner-operator market in New England and indicated that we might see this market come back in 2016. As it turns out we will likely broker more owner operator hotel properties this year than in any year since the mid 2000s. The new owner-operator buyer seems to be much more prepared than in the past and have a plan of improvement in property condition, marketing and operations. But still a major theme; “once I get this property ramped up and operating efficiently I would like to purchase another one”. I once heard a phrase that has stuck with me for many years when an owner said to me “I am going to build a company”. I love it when I hear this as I have been involved with a number of current regional companies that have done just that as Jamsan Hotel Company based in Lexington, Mass. is such a great example. The head of the company bought his first hotel from me in 1992 for $425,000, his company now owns about 55 hotels throughout New England and I have many other examples that are similar.

The hospitality business is challenging and rewarding and as a hospitality brokerage firm we had our best year in 2015 and it now looks as if 2016 could be just as good.

Earle Wason, CCIM, is president and owner of Wason Associates Hospitality Real Estate Brokerage Group, Portsmouth, N.H.