20 Jan2015

Hotel Transaction Overview

Prepared for Hunter Hotel Advisors by Vince Ciepiel



 Hotel Cap Rates down modestly throughout 2014 to finish the year at 7.7%;

 spread over the 10 Yr remains near 500bps


Throughout 2014, cap rates in the hotel sector declined modestly (down 20-30bps) to finish the year at 7.7% (full yr average closer to 8%). Transaction volume in the hotel sector represents only about 10% of total commercial real estate activity transactions, and therefore cap rate data in the sector is more subjective as there are fewer transactions. Relative to other sectors, hotels continue to trade at premium cap rates (~150bps vs. Retail/office; ~200bps vs. Apartment) as shown in the chart below:



In terms of spread, hotel cap rates remained close to 500-550bps above the 10yr benchmark throughout 2014. This compares to the average spread of all property sectors, which is currently near 350bps. We provide the hotel cap rate vs. Ten-year treasury below:



From a market perspective, CBD hotel properties showed more meaningful declines in cap rates (~35bps) throughout 2014, while suburban hotel cap rates were somewhat flat. This is likely a byproduct of increased activity in the full-service segment from both private equity and REIT buyers looking for institutional quality assets in gateway markets. As expected, Economy properties traded at the high end of the spectrum at 9% on average and remained flat/slightly down throughout 2014, while Luxury properties traded near 7% on average and continued to decline. Looking at cap rates by major city, the NYC metro region remains the lowest at 6.3%.



Transaction Review – Deal volume and hotel values continues to rise

Deal volume across U.S. commercial real estate continued to rise throughout 2014. Total deal volume totaled $460B in 2014, up just over 20%  ($85B in $ terms) from 2013. Hotel transactions represented about 10% of total deal $ value, and was one of the faster-growing sectors in both $ (up $13B) and % (up 46%) terms in 2014.



Total Hotel transaction value totaled $41B in 2014 vs. the $28B seen in 2013 (data according to RCA; includes deals of $2.5M or larger and deals in contract that are not yet closed). Looking at Hotel transactions by type, Full service continued to represent the majority of deal value in 2014 (66% of total vs. 71% in 2013), but grew at a slower rate (up 35% yr/yr) than limited service (up 75% yr/yr). In $ terms, Full-Service transaction growth was up $7B in 2014 (was up a similar $6B in 2013), while Limited Service transaction growth stepped up meaningfully to $6B in 2014 (was only up $2B in 2013).




The New York Metro area continued to dominate the deal landscape with a total of $7.2B (Avg 6.3% cap rate), followed by Hawaii, San Fran, South Florida, and Los Angeles all coming in near the $2-3B range. Together, these top 5 markets accounted for almost half of all transaction activity in 2014 ($18.5B of the total $41B).



The top 20 largest buyers and sellers combined to represent half of the total transaction volume in 2014. A step up in activity on behalf of large REIT’s and Private Equity drove deal flow throughout 2014.





Vince Ciepiel is an analyst at Cleveland Research

(216) 649-7253

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