The data reflects
the date of the sale closing, not the date of contract. Based on typical
contract-to-closing timetables, most of the transactions were in contract
two to four months prior to the closing. Due to delays in data
collection, some increase in the number of transactions is expected in the
most recent months. The first – and
most obvious – observation is the dramatic decrease in the number of
transactions since September 11th. The decrease was almost immediate, but
it was also a continuation of a downward trend that had begun earlier in
the year. In both the second and the third quarter of 2001, the
number of transactions was well below the levels reported in 2000, and
also below the activity seen in those quarters in 1999. It is notable that
the data for September 2001 is almost on par with the September 2000 data.
The transactions listed for this month include sales that closed both
before and after September 11th. However, we are
aware of numerous transactions that had been scheduled to close in the
latter half of September that were delayed and closed at some point in the
fourth quarter of 2001. Others were cancelled altogether. In light of the
delayed and cancelled closings, the decrease in sales activity in the 4th
quarter is of even greater significance. In a typical cycle, these
closings would have completed contracts signed in the third quarter, a
time when the industry was already showing signs of weakening. Further,
the availability of financing was increasingly limited, as lenders adopted
a cautious attitude toward the hospitality sector. This caution escalated
after September 11th, and over the balance of the year,
financing for hotel transactions was all but unavailable. The combination of limited financing availability, faltering operating performance, and widespread uncertainty prevailed throughout the fourth quarter of 2001, and had a depressing impact on the sales activity into 2002. In the first quarter of 2002, only 14 transactions closed, followed by 20 in the second quarter. To date, nine transactions have been reported in the third quarter; however, these totals may increase, due to the lag in reporting transactions. The recent totals are roughly half the number reported for the same periods in 2001, which were in turn well below 2000 levels. Where
are the Sellers? The limited transaction activity is not due to a lack of buyer interest. In the months since September 2001, numerous opportunity and equity funds have been established. These funds were started with the intention of taking advantage of the hotel failures and foreclosures that were expected, and have been modeled after the funds that flourished in the wake of the 1990/91 economic downturn. While there are many buyers active in the market, there has been a dearth of sellers. This situation is particularly true of the assets valued over $10,000,000. There are numerous reasons for the lack of seller activity, but the chief interpretation is that potential sellers (i.e. current owners) recognize that the present environment of depressed values, poor operating performance and limited availability of financing is not likely to yield purchase offers that meet the sellers’ expectations or return requirements.
Despite
the financial stresses resulting from the depressed RevPAR levels, the
cost controls implemented by managers have helped to contain losses and
essentially buy some time for many owners. Those with properties financed
by floating rate loans have also benefited from the current low interest
rates. These circumstances are helping many owners to hold on, and
wait out the current market conditions. Also influencing the reduced level of sales activity is the significant gap between asking prices and purchase offers. Many of the buyers who are active in the market are looking for “great deals,” while most sellers who are testing the waters view the current circumstances as temporary, and have not reduced their price expectations by the same degree as their hotel’s RevPAR levels have fallen. While this gap remains, few transactions are likely to occur. Some
Historical Perspective The pattern of reduced sales activity we are seeing today is consistent with the market trends in the early 1990s, when a recession and the Gulf War combined to depress both hotel RevPARs and hotel values. Exhibit 10 summarizes the annual volume of sales activity since 1990.
1990 was a strong year for hotel transactions, in terms of both the number of transactions and the average price per room. In 1991, with the Gulf War breaking out in January and a recession in effect, both the number of transactions and the average price dropped sharply. Transaction levels remained low through 1993, and began to accelerate in 1994, as industry performance improved and financing became more readily available. Average prices remained low through 1995; the depressed prices are somewhat artificial, in that many of the transactions that occurred during these years involve the disposition of assets by the Resolution Trust Corporation (RTC). One of the principal goals of the RTC was to dispose of all of the assets it held. This motivation affected the RTC’s pricing strategy, which was characterized by discounts off of appraised values, and thus their transactions reflected prices that were low even in the context of the industry’s soft performance. It was not until 1996 that transaction volume and prices saw any significant increases. By 1996, financing through the CMBS market was widely available. Moreover, that year saw the emergence of the REITs, including Felcor, Starwood, and Patriot American, as aggressive market participants. Strong acquisition activity continued through 1998, slowing in the fourth quarter of that year, as the crises in the Asian markets led to a capital market readjustment in the US, and market activity dropped dramatically. Prices continued to climb through 1999, but transaction activity was off sharply. In 2000, more transactions occurred, but the average sales price decreased significantly. In 2001, the transaction volume was off sharply. As we have discussed, much of the decrease in activity occurred in the last four months of the year. We expect the same pattern of decreased activity and lower sales prices, followed by accelerated growth in both indexes, to prevail over the next several years. Those transactions that occur in the near term are expected to reflect sales prices that reflect decreases from the levels attained in the late 1990s, although we do not expect the decrease in prices to be as severe as that observed in the early 1990s. As RevPAR levels improve, we expect transaction activity to pick up; the average price per room is also expected to increase. Obviously, the specific levels of sales activity as well of the sales prices of the properties transacted depend on individual buyers and sellers, as well as the specifics of each individual property. What’s
an owner to do? The first, and perhaps most obvious strategic direction for owners is that they should probably not sell hotels in the current market, but rather wait until RevPAR levels recover and market conditions stabilize. However, although this strategy is obvious, there are other issues to consider. Chief among these is the large number of buyers who are currently chasing the limited number of assets on the market. While this condition does not result in a “sellers market,” it can put some downward pressure on cap rates, as potential buyers compete to make the best offer. These offers are not likely to completely close the gap between the bid and the asking price, and most sellers will be forced to moderate their expectations. But if disposition of select assets is a part of an owner’s long-term portfolio management strategy, it may well be worth the time and effort to explore current selling opportunities. &nbs | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
