When Norwalk, Connecticut based HEI Hospitality paid $74 million for the Algonquin Hotel last September, it appreciated the history that came with the 104-year-old building. The hotel was home to the legendary Algonquin Round Table, a gathering of Jazz Age writers that included Dorothy Parker and George Kaufman. But HEI valued the 174-room hotel’s prime Manhattan location on West 44th Street and its upscale reputation even more.
“We targeted Manhattan as a city we want to invest in, and the location is great,” says Gary Mendell, CEO of HEI, which made the acquisition on behalf of its latest fund, slated to have $900 million of properties when fully invested. “The history of the hotel was a bonus.”
Although travel suffered in the wake of the 2001'02 recession, for the past two years the hotel business has been healthy and the hotel-buying business, robust -- some say too much so.
According to Daniel Lesser, hospitality and gaming group industry leader for New Yorkbased real estate services firm Cushman & Wakefield, there were $757 million of hotel sales in 2002, roughly $3.4 billion in 2003 and nearly $5.8 billion in 2004.
Almost $4.5 billion of significant (selling for $10 million and up) hotels traded hands in the first half of 2005, and the annual figure seemed likely to soar because of a single transaction: Host Marriott Corp.'s purchase, for $4.1 billion in cash and stock, of a property portfolio of Starwood Hotels & Resorts Worldwide. Announced in mid-November, the deal includes 28 North American properties and ten more around the globe.
Real estate investment trusts and funds fueled by institutional investors have been the most active buyers and sellers. Morgan Stanley Real Estate paid $287 million for the 646-room New York Marriott East Side for its Prime Property Fund; Trinity Hotel Investors of New York teamed up with Goldman, Sachs & Co.'s latest Whitehall Street real estate fund to buy the 483-room Resort Suites in Scottsdale, Arizona, for an undisclosed sum; and Strategic Hotel Capital paid $154.7 million to buy the 692-room Fairmont in the Chicago REIT’s hometown.
“This is one of the more frenzied paces we’ve seen in a number of years,” says Cushman & Wakefield’s Lesser.
According to the American Hotel & Lodging Association, the industrywide average occupancy rate reached 61.3 percent in 2004, up from 50.4 percent in 2003 and 59.1 percent in 2002. RevPar -- revenue per available room, a key income indicator for the hotel industry -- averaged $52.90 a day for both 2004 and 2003, versus $49.41 in 2002. Both statistics are expected to show even greater improvement for 2005 figures.
Moreover, according to Portsmouth, New Hampshire, research firm Lodging Econometrics, the pace of the increase in new hotels planned is sliding. There were 2,792 hotels totaling 377,000 rooms in the construction pipeline at the end of the third quarter. That’s 30 percent fewer than during the previous cycle in the 1990s. Rising construction costs are helping to keep new development in check.
Says HEI’s Mendell: “Supply is at historically low levels, and demand is growing solidly. With very favorable supply and demand growth rates, we have many years ahead of industry-norm revenue growth.”
Still, the sector faces several risks. Rising energy costs could have a major impact, both in boosting operating expenses and in decreasing travelers’ spare cash.
Strategic Hotel CEO Laurence Geller, who has been both buying and selling, warns that with all the investment activity and the resulting rise in prices, the market may be getting a bit frothy.
“We’re seeing people just taking advantage of cheap debt and hoping for the cyclical upside,” he says. “But when the exit comes, they better have higher earnings growth through the cycle to come out ahead, or they may be disappointed.”
