Northeast hotel transactions volume slows - A good time to hold hands with your lender - by Jim O'Connell

James O'Connell, O'Connell Hospitality Group

Wall Street analysts have hit the publicly traded hotel companies pretty hard in the last six months, effectively taking the REIT’s out of the acquisitions market. A ripple effect through the investment side of the industry has caused a pause in the rapid pace of transaction volume. The best buyers that were paying the highest prices have vacated the market. The top has come off of the market. Private equity investors with higher yield/return requirements became the go-to vehicle for acquisitions and a repricing of assets has become commonplace across the country in every segment of the industry from luxury to limited service. As with every downward market correction, repricing has caused sellers to pull back. Having been told their assets were worth more only a few months ago, the realization that those prices just don’t exist any longer, will take a few months to settle in. Many will choose to refinance their assets rather than trade them.

Portfolio and single asset sales large and small have stalled. With uncertain financial markets and negative trending albeit positive hotel performance are the primary causes for this lull. The good side of this equation is that new supply and its effects on local markets has not been a factor. Hotel performance across the country continues to be very good. According to Pinnacle Advisory Group of Boston hotel performance in 2015 experienced another record year. City wide occupancy was up to 81.8% (up .2%) and Average Daily Rates increased 6.4% to $254.10 for a combined RevPar increase of 6.7%. The Boston occupancy just can’t get any better considering the terrible winter weather we had in the first quarter of the year.  Boston remains one of the strongest hotel markets in the country. New supply issues will not affect Boston as the cost to construct with union labor often causes the feasibility of hotel construction to cancel or delay projects into the next cycle. Thousands of hotel rooms have been permitted. We just won’t see them come out of the ground. That’s a good thing for overall hotel performance.

The strong dollar versus other foreign currencies will dampen travel to the United States. This impacts cities like New York, Washington D.C and Los Angeles. The corporate demand for hotel rooms in Boston and surrounding areas will absorb the lost volume of foreign travelers. Finding a room in Boston in July and August will continue to be very difficult and very expensive.

Outside of Boston, markets continue to chug along. Portland has absorbed the new supply of 600 new rooms over the past four years and is ready to accept 200 more by 2018. Similarly, Portsmouth, N.H. has experienced a boost in supply and that will continue with projects anticipated to come on line in 2018. Burlington, Vt. remains strong as does Hartford. Tertiary markets where land is cheaper and the overall costs to construct are less expensive will see supply increases that should cause concern. As an example, Worcester is slated for 700 new rooms between hotels soon to open and others in the pipeline. The demand in those market does not justify these additions to supply. The theory of “newer is better” makes some sense initially, however, those hotels that get pushed further down the demand chain find it more difficult to fill their rooms inventory and to combat this, they cut or hold existing room rates causing the whole rate structure for the market to stall. Inabilities for new hotels to push rates causes challenges to meet projections. Inabilities to meet rate growth projections makes lenders nervous. Those nerves cause a pullback in overall lending. Once nervous tension sets in, it’s time to meet with your lender and hold hands.

Recent transactions in the metro Boston market are reflect a continued bullish attitude towards hotel market performance. The Hotel Tria near Alewife Station, Cambridge sold for approximately $400,000 per room.  The 259 guestroom package deal for the Aloft and Element Hotels in Lexington, Mass. traded for $54 million or roughly $210,000 per room. In tertiary markets and for more limited service hospitality assets, the Sleep Inn, Londonderry, N.H. traded for a 10% direct cap rate at over $50,000 per room with the Fairfield Inn Middleboro, Mass. scheduled to close this month for $50,000 per room price, before a $30,000 per room product improvement plan is to be conducted.

In a quest for quality assets in strong markets we anticipate seeing an increase for hospitality asset sales in seasonal markets on Cape Cod, Nantucket, the Berkshires, the Newport area, ski areas in Vermont, New Hampshire and the seacoast of Maine.

Once the uncertainty of the financial markets dissipates, more aggressive publicly traded companies will reenter the competition for attractive hotel investments and transaction volume will tick upwards. However, one should never forget, it is always a good time to hold hands with your lender.

James O’Connell is the principal of O’Connell Hospitality Group, LLC, Danvers, Mass.