The number of hotel transactions is up by more than 50% for the first nine months of 2013 over the comparable period last year. Sales transaction volume of hotels is nearing the long term annual average. According to Hotel Valuation Services (HVS) hotel values will continue to increase at an average rate of 12% for each of the next three years, this is substantially less than we have experienced the past couple of years, due to climbing out of “the Great Recession”, but still a nice increase in value. Hotel values are now reaching their 2006 peaks. There is an active market for hotels fueled by cheap financing. For existing hotels with cash flow, financing is available as cheap as 4% fixed rate 10 year money for prime assets, and only a little more expensive for non prime assets. Interest rate increases have taken a temporary pause as the result of the current Government Shutdown, but are sure to tick up slightly after Congress reaches a compromise. As interest rates rise values decrease.
Values have increased in part due to record low supply growth these past few years. That is about to end. New hotel developments in the pipeline will increase supply in the next couple of years, creating competition with older product, making it harder to continue Rev Par and profit increases in the future. Some areas already have more than their proportionate share of new development. If there are three or more new hotels coming into your market you should look at selling, as NEW ALWAYS WINS.
The only thing limiting the growth of hotel sales transaction is a lack of quality hotels that are reasonably priced. As interest rates increase the gap will widen in seller and buyer expectations. Rates appear to be on the rise and it doesn’t look like we will see financing this cheap for another cycle, if ever. It is easier to cut a deal when financing is cheap. It can’t get much better than it is now so it is better to sell sooner than later.