By Jim Costello on June 23rd, 2016
Across all commercial property sectors covered by Real Capital Analytics, the hotel sector stands out as the only one posting steady increases in cap rates over the last year. The cap rate trends into May ’16 were flat from the previous month, however, giving investors hope that the worst may be over. It is too soon to call that flat trend a turning point but one is coming.
Cap rates have crept steadily upward over the last year hitting 8.5% in May versus 8.2% a year earlier. Still, that pace of increase has stalled over the last three months. At the same time, into April and May the average price per key has climbed again and is now back above $150k.
This combination of rising prices and flattening cap rates may lead one to believe that hotel NOI is starting to grow. Smith Travel Research noted that RevPar did grow in May, but noted that it may be “an outlier rather than a reversal of fortune”.
Sample issues are likely at play in recent performance. From Q3’14 to Q2’15, deal activity in the 6 Major Metros, the priciest areas in the U.S., accounted for 33% of all deal volume. Into Q1’16, investors have simply been more active in the 6 Major Metros with 41% of all activity focused in these areas from Q4’15 to Q1’16. Prices are up as investors are more focused on these high-priced locations.
Still, there is good news suggesting a turning point ahead. Deal volume for portfolio and entity-level sales were down 98% from a year earlier in May ’16. How is that kind of a decline good news? It is a story about the market returning to “normal” patterns.
Early in 2015, the hotel market saw a surge in portfolio and entity-level deals, up 117% from a year earlier in the period from January ’15 to May ’15. Into June ’15 and then the later parts of 2015, the pace of these megadeals slowed considerably.