JLL: Stable Hotel Transaction Volumes, Growing Debt Fund Activity

The global lodging market’s current cycle is positioned to carry on–2018 transaction volume should match last year’s $28 billion level–said JLL, Chicago.

“Investor sentiment has turned more positive due to rising global GDP growth forecasts, tax reform in the U.S. and projected growth in international tourist arrivals,” said JLL Hotels and Hospitality Group Global CEO Mark Wynne Smith. “This optimism directly benefits the lodging market, evidenced by continued robust revenue per available room forecasts.”

JLL cited a “diverse” buyer pool for hotels at the moment. “Private equity firms have a significant amount of capital ripe for deployment into hotel real estate and public real estate investment trusts will likely remain key buyers given the health of their company valuations. In addition, high net worth and family office investors both domestic and off-shore are becoming more involved in the sector.”

Wynne Smith said institutional investors will also continue to grow as hotel asset buyers as they strive for income diversification and grow more familiar with the hotel real estate market. Institutional investors’ buyer share of hotel acquisitions has doubled in the past few years.

“Today, we’re seeing more and more deals being driven by generalist investors as opposed to investors who focus solely on hotels,” Wynne Smith said. Generalist investors have seen nearly 10 percentage points of growth in market share since 2014.

Foreign capital accounted for $4.4 billion in North American transaction volume last year and will remain an important factor in the U.S. lodging market. JLL Managing Director and Head of Global Hotels Gilda Perez-Alvarado said she expects the U.S. will remain the primary beneficiary of cross-border investment. “Investors from Hong Kong, Singapore and Korea will continue to be the most active from Asia, while Chinese activity is expected to decline,” she said. “Middle Eastern activity is also anticipated to pick up in 2018 following a considerable recovery in the price of oil from 2017 levels.”

Meanwhile, debt funds emerged as a major hotel lending group last year as traditional banks tightened their loan issuances, JLL said. Debt fund investment in hotels more than tripled in 2017, jumping to $49 billion from $16 billion in 2009.

“That trend should continue as investors search for higher returns in what is expected to remain a relatively low interest rate environment,” JLL said. “As they provide exposure to real estate with relatively lower risk, more flexible capital requirements and higher loan-to-value compared to traditional bank lending, debt funds will remain an attractive option for hotel investors.”