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Business Observer Thursday, Dec. 2, 2021 8 months ago

Room boom: Hotels have become a hot commodity

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Hotel properties across the region are generating solid returns for investors. The trend appears to have staying power.
by: Louis Llovio Commercial Real Estate Editor

While headlines have focused on the hot housing and multifamily market for most of the year, another sector of the commercial real estate industry in Florida has gone about its business quietly, seeing heavy volume and record pricing.

Hotels.

Despite the near total collapse in lodging traffic just 18 months ago, hotels across the Gulf Coast, and the entire state, are seeing a resurgence in the number of travelers coming for visits. On an almost monthly basis, local tourism groups are reporting increased bed tax collection and decreasing vacancy rates.

This, along with other economic factors, have led to a spike in the number of hotels trading hands in 2021 at, often, breathtaking numbers.

In Naples, the Naples Beach Hotel & Golf Club sold for $362.3 million. While that’s a special property with a long history and the new owners plan a massive redevelopment there, a 115-unit SpringHill Suites on Clearwater Beach sold in October for $51.8 million — nearly $20 million more than its previous owner paid three years ago. The adjacent property, a 140-room Residence Inn, sold for $63.1 million in October, up from $38.9 million in 2018.

'When you have friends or family, or co-investors, come into town, it’s a whole lot more fun to take them to your hotel than it is to take them to your industrial building.'  Lou Plasencia, CEO of The Plasencia Group

Beach and waterfront properties offer a good picture of the demand for hotel properties and how much buyers are willing to pay. But the hotel market is showing strength far beyond the beaches — and beyond Florida.

LW Hospitality Advisors’ Q3 2021 Major U.S. Hotel Sales Survey, released in October, reported 90 single-asset sales — making up about 27,000 rooms — that totaled $14.4 billion. Of those sales, 16 occurred in Florida, followed by 11 in California, eight in Washington State and seven each in Georgia and New York.

Last year’s third quarter survey showed 12 single-asset sales, making up about 2,700 rooms, totaling $829 million.

Given a vaccine hadn’t been released at that point and uncertainty lingered about when “normal” would return, and what it would look like, it’s difficult to compare 2021 to 2020. But the 2021 figures when compared to 2019, before anyone could even imagine a pandemic was looming or comprehend the fallout, reflect solid growth.

LW Hospitality’s 2019 third quarter survey reported 40 sales, making up about 13,100 rooms, totaling about $3.7 billion. “After several quarters of limited sales volume, the flood gates opened in Q3 2021,” the survey's authors write.

Terrific tourism 

Helping boost the interest in hotel properties is the boom in tourism over the past year.

In late November, Lee County announced it collected more than $53.3 million in bed tax for the fiscal year, a record for tourism revenue and up from the $42.6 million collected fiscal year 2019. In Hillsborough County, bed tax collection rose by 7.04% between 2020 and 2021 to $38.4 million.

The industry is still facing headwinds, though. While the average tourist is mostly back, business travel is off; there are still major workforce issues; and in localities like Tampa, where a large number of new hotel rooms have recently come online, revenue is down as hoteliers compete for dollars.

Industry research firm STR reported that in October the occupancy rate for hotels nationwide was down 8.8% from 2019, to 62.9%. But the average daily rate for rooms was up 1.2%, to $134.78. 

Considering there have been spikes in COVID-19 infections and that life for many has not completely returned to normal, hoteliers say the foundations of the industry remain strong.

“We have been extremely busy at our hotels and very pleased with the way business levels have come back, in some cases better than pre-pandemic,” says Joe Collier, president of Mainsail Lodging & Development, which includes hotels in Tampa, Anna Maria Island, Fort Myers and Clearwater in its portfolio.

The beach properties began coming back strong last year as leisure travelers became more comfortable with traveling and group and business travel is starting to tick up, he says.

While it’s easy — and possibly naïve — to attribute high prices and high demand for hotel properties to better profits expected as tourists return, the reality is there are bigger economic principles in play.

Economics 101

Replacement costs is one of those.

Severe shortages of lumber and materials have slowed construction and led to higher prices, meaning buyers are jumping on existing properties rather than trying to put together development deals. This means hotels will likely be a better long-term investment given that, regardless of the complicated economics of hotel ownership, prices are likely to remain high for the foreseeable future.

“Obviously everything begins on revenue, on income,” says Kent Schwarz, executive managing director overseeing hotels for Colliers International in Tampa. “But when you go to sell it, replacement cost is a consideration of land cost. And it’s going up significantly.”

Also driving buyers to hotels is the pricing of office, industrial and multifamily properties, which are seeing low cap rates, real estate analysts say. Investors, especially institutional investors, have seen this and moved toward the hotel sector where cap rates — the rate of return on a given property, based on rental income and other factors — are between 100 basis points and 200 basis points higher.

Another factor is inflation.

While this is a dreaded word usually sending those looking to make money scurrying to the nearest bomb shelter, hotels are uniquely set up to manage during periods of inflation. This is because hotels depend, mostly, on single-night rentals while office, industrial and apartment properties operate on long term leases with set rents.

When inflation is rising or high, hotels have the flexibility to raise rates on a nightly basis to adjust for rising costs while the other classes of properties are locked in. This means “lodging presents a great hedge against inflation” for investors, says Lou Plasencia, CEO of The Plasencia Group, a Tampa-based hotel developer, brokerage and consulting company.

“You can really do very really in inflationary periods.”   

Between the boom in tourism and the economic principles in play, the current return on investments on hotel properties, depending on what market the property is in, is significantly higher than other asset classes. That’s especially true in markets like Florida, and other Southern and Western states, that are doing very well because of warmer weather and fewer COVID-19 restrictions. That should remain the case as forecasts call for leisure travel to remain strong through the end of next year and into the tourist season of 2023.

That likely means the hot market for hotel properties should also stay steady — or strengthen — in the foreseeable future.

Hotels? Sexy?

Oh. There is one more factor that’s keeping the hospitality sector attractive to investors, says Plasencia: “Sexiness.”

“You can feel it, touch it, sleep in it, eat in it. It’s interactive, it’s full of people,” he says.

“As opposed to an industrial building, where it’s a cavernous warehouse with roll-up doors. There’s just nothing overly sexy or attractive about that. It’s pretty down and dirty… when you have friends or family, or co-investors, come into town, it’s a whole lot more fun to take them to your hotel than it is to take them to your industrial building. Or your apartment complex. Or your office building.”

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