Drop in Hotel Volume Seen as a Return to Normal
By Carrie Rossenfeld
IRVINE, CA—The decline in dollar volume for hotel sales in 2016 is not really that significant since we were coming off a record-breaking year in 2015 and the decrease was anticipated, Atlas Hospitality’s president Alan Reay tells GlobeSt.com. According to the company’s 2016 YE California Hotel Sales Survey, the decline in total dollar volume that we saw in its mid-year report carried through to the end of the year.
California hotel sales volume was down over 54% for the year, while individual sales transactions were down 18%. These figures compare to a decline in hotel sales volume of 30% and individual transactions down 43% for the US overall (as reported by Real Capital Analytics). We spoke with Reay about the takeaways from the report and what they indicate about the hotel sector this year.
GlobeSt.com: How significant is the decline in dollar volume for hotel sales to the overall health of the hospitality sector?
Reay: It is not really that significant since we were coming off of a record breaking year in 2015, so we anticipated that dollar volume and number of transactions would be down in 2016 as we get back to more of a “normal” year for California hotel sales.
GlobeSt.com: What factors do you believe are causing this decline?
Reay: In 2015, there were a lot more buyers in the market chasing hotel sales, such as REITs (high cash position and high stock prices), overseas investors (especially from China), private-equity firms looking for higher returns than in other forms of real estate and, last but not least, 1031-exchange buyers. In 2016 REIT prices declined (most around 50%), and they became net sellers of hotels; private equity pulled way back, and lenders became more cautious with interest rates moving up, all creating downward pressure on sales activity.
GlobeSt.com: When might sales figures rebound, and what could cause them to do so?
Reay: We do not see sales going back anywhere close to the levels seen in 2015 (as stated a record breaking year); we see sales remaining flat to down for the next three to five years as new supply hits the market and interest rates start to move up.
GlobeSt.com: What else should our readers take away from your hotel-sales survey?
Reay: Not to read too much into the decline in sales volume, since 2016 actually is in line with what we would see in an average sales year in California. There are still buying opportunities in many markets, where hotels are not maximizing their potential through either mismanagement or a brand repositioning. However, the days of just buying a hotel and sitting back and letting the market push up appreciation are probably behind us. Remember, hotels are an operating business first and foremost and real estate second, so those buyers who know how to manage and operate will always come out ahead in the long run.