CHICAGO—While Jones Lang LaSalle Hotels is predicting that the pace of U.S. hotel transactions in 2012 will likely mirror that of 2011, the company also acknowledges that the strength of the CMBS market and the many maturing loans outstanding could dramatically alter the appetite for acquisitions in either direction.
The company released its 2012 Financing Outlook exclusively to HOTEL BUSINESS®, and it included the forecast for roughly flat transaction volume in the U.S.—which came in at $15.2 million last year—as well as a return to the market for institutional and foreign investors and the continued withdrawal of REITs. The report also noted that some $30 billion in CMBS loans will be reaching maturity in the U.S. and it is likely that many loans will likely be extended for three or more years.
“Given that banks continue to push out maturities to 2015-2017, all eyes will be on how the pricing and appetite for floating rate CMBS evolves in 2012,” said Mathew Comfort, EVP, Jones Lang LaSalle Hotels. “Swaps and spreads will continue to be volatile during 2012 and investors need to carefully time when to lock in an interest rate.” Global deal volume, meanwhile, is also expected to be flat compared to last year, which was roughly $31 billion.
CMBS loans currently represent about a third of outstanding U.S. hotel debt. Jones Lang LaSalle chairman Arthur de Haast noted the CMBS shakeout will have at least a minimal impact on lending. “There will be some increased liquidity in the U.S. because of CMBS opening up further,” he said, while adding it “won’t be significant.”
In terms of foreign investors, de Haast said the Middle East is expected to be a considerable source for U.S. investments in the coming year, noting “there’s strong liquidity in these markets due to oil prices and the desire to diversify.” He added for the West Coast of the U.S., there is “still good interest from Asia.”
Meanwhile, when it comes to REITs—which were largely responsible for the surge in transaction activity in the U.S. during the first half of 2011—de Haast noted they weren’t expected to be as active going forward this year. He indicated they that would likely be hampered by “the current stock price, and also their ability to acquire assets at prices/cap rates that enhance earnings.”
According to the report, another fallout of the anticipated decline in REIT activity is a likely decrease in average size of single asset transactions, as the REITs last year acquired an unprecedented amount of upper upscale and luxury assets.
The availability of equity capital for high-quality hotel transactions is expected to remain high with the re-emergence of opportunity funds, value-added funds and core plus funds, which typically allocate 15% to 20% of their equity to the real estate, Jones Lang LaSalle reported. To mitigate any negative impact of individual asset performance, loan originations may be capped at $100 million, with larger deals requiring a consortium of lenders to spread out the downside risk.
De Haast noted that with regards to the U.S. market specifically, he expects the second half of the year to drive more activity than the first half. In addition, he cited San Francisco as a market that has “really caught investor’s attention,” and he further noted that Miami will “be big in 2012.”
In addition, the consensus in the U.S. investment community is that hotel operating performance will continue to improve in 2012, leading to further revenue per available room gains, albeit at a moderate pace compared to 2011.
Speaking from a global perspective, de Haast commented on the potential economic factors that could skew the anticipated results for 2012 in one direction or another.
“The biggest risk is the failure of the Euro, (or at least several other countries having to withdraw other than Greece), which is likely to cause a more severe recession in Europe, impacting growth in the U.S. This will cause a significant slowdown in volumes in Europe and have some impact in the U.S. If the Euro holds up, growth in the U.S. could be stronger and thus volumes better than forecasted. However, downside risks probably outweigh the upside at present,” he said.
