RCA Insights

A Turning Point for Hotels? Not Quite for May ’16

By 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.

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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. 

Jim Costello

Jim Costello

Senior Vice President
jcostello@rcanalytics.com

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.