US transactions market passes cyclical low: study
Published: 23 Nov 2009
A study has indicated that hotel investors’ sentiment for short-term (six-month) performance in the Americas increased for the first time following six consecutive semi-annual declines and, while still negative, stands at a three-year high.
“While our newest survey reaffirms that investors believe that operating fundamentals still have further to drop over the short term, respondents’ medium-term (two-year) trading performance expectations improved for 80 percent of the Americas markets surveyed, with investor outlook for international gateway cities at the forefront,” said Arthur Adler, managing director and CEO for Jones Lang LaSalle Hotels.
According to Jones Lang LaSalle Hotels’ bi-annual Hotel Investor Sentiment Survey, this improvement in sentiment is a clear indication that investors sense the Americas hotel market is getting closer to the point when RevPAR will flatten out and start to show marginal growth in year-over-year comparisons. The largest shift in investment intentions was marked by the increase in `buy’ sentiment, reaching its highest level in three years. This survey represents the second consecutive survey where investors’ `hold’ sentiment decreased.
“Through year-to-date 2009, U.S. hotel transaction volumes are at their lowest level of the decade. However, sales volume in the third quarter almost doubled from the previous quarter, providing evidence that the transactions market has passed its cyclical low,” said Adler.
The ‘buy’ sentiment for New York jumped by over 20 percentage points as investors hope to acquire assets in the market at attractive discounts to replacement cost. The other cities attracting the highest investor attention for acquisitions in the U.S. are Los Angeles (61.9 percent), Washington, D.C. (58.6 percent), San Francisco (57.4 percent), San Diego (56.6 percent) and Boston (54.0 percent). “Savvy buyers who are in a strong cash position and who can be aggressive will be able to benefit from the select buying opportunities that emerge,” said Thomas Fisher, managing director for Jones Lang LaSalle Hotels.
Leveraged IRR requirements in the Americas marked a 115 basis point increase on average, but expanded at a lesser rate compared to the previous survey.
Highlights from the survey:
• An increase in short-term trading performance expectations was recorded in all three regions, but sentiment remains least negative for Asia Pacific at -3.5 percent.
• Green shoots are growing roots, most notably in the major gateways and Asia Pacific. Positive medium-term trading is expected in 66 of the 93 markets tracked with the majority of markets expected to bottom through 2010.
• In a reversal of the trend which has been apparent over the last 18 to 24 months, leveraged IRRs (-100 bps to 19.2 percent) and initial yields (-50 bps to 9.3 percent) both recorded a notable contraction. However, it is too early to assert that the bottom has been reached.
• Investors still expect cap rates to continue to trend upwards over the next six months, although sentiment has weakened.
• Global investment intentions have remained largely unchanged over the past year. The overarching intention is to hold, with this sentiment still at its highest level since 2002.
• The buyer to seller ratio increased marginally to 3:1 – the highest level in 18 months.
Markets move from recession to recovery
Expectations for global short and medium-term trading have both spiked upwards compared to our April 2009 survey to reach a netbalance of -31.0 percent and 22.6 percent respectively as investors expect the majority of trading markets to bottom through 2010. While all regions recorded an improvement in sentiment, it was strongest for Asia Pacific, reflective of growing confidence in the region’s role as the leader for economic recovery. While showing a marked improvement, expectations remain unusually low, weighed down by the dour short-term outlook in the U.S. and Europe. Sentiment ranges from 27.9 percent in New Delhi to -78.7 percent in Phoenix with positive trading expected in only fourteen markets globally – thirteen of which are in Asia Pacific. Sentiment is strongest for New Delhi, Hong Kong, Singapore, Perth, Shanghai and Mumbai.
Sentiment for short-term trading is lowest for the Americas at -44.9 percent, but has increased for the first time since June 2006 following six consecutive declines. Markets driving this turnaround include New York, Washington, D.C. and Rio de Janeiro. Brazil entered recovery mode in the second quarter of 2009 and sustained economic growth is expected. The announcement that Rio de Janeiro will host the 2016 Summer Olympic Games is also buoying investor sentiment.
In EMEA, while trading is still expected to decline over the next six months, negative sentiment halved compared to April 2009 to 38.0 percent. Positive expectations are most evident in the key cities of Western Europe but London is the clear standout. London is the only city outside of Asia Pacific where sentiment for short-term trading is positive. A weak pound has staved off a dramatic decline in international visitation throughout 2009 and hotel occupancies have remained high.
After contracting by approximately 1 percent in 2009, global economic activity is forecast to expand by 3 percent in 2010. While well below the rates achieved before the crisis, lodging demand is strongly
correlated with economic growth and therefore hotel investors remain cautiously optimistic about the recovery.
Reflecting this, sentiment for medium-term trading recorded its most marked increase since the survey’s inception to average 22.6 percent and is positive for 66 of the 93 markets we track. Expectations are weighted in favour of the major gateways (47.0 percent) and Asia Pacific (40.0 percent). This compares to 18.5 percent in the Americas and 13.2 percent in EMEA.
Nine markets are ranked above 60 percent - Hong Kong, New Delhi, Washington D.C., Shanghai, New York, London, Paris, Sydney and Mumbai. Global hotel markets have not recorded medium-term sentiment in the 60 percent-range since 2007 which indicates that investors expect these markets to rebound sharply from their depressed base.
The triggers for this rebound are strong public policies which have supported demand and all but eliminated fears of a global depression. Central banks reacted quickly with exceptionally large interest rate cuts, as well as unconventional measures to inject liquidity and sustain credit. Governments launched major fiscal stimulus programs while supporting banks with guarantees and capital injections. Together, these measures reduced uncertainty and increased confidence, fostering an improvement in financial conditions, as evidenced by strong rallies across equity markets and a rebound of international capital flows.
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Jim said on 24 Nov 09:
While it is good to read that somebody is optimistic about the near term future of the hotel industry, I can't help but wonder whether this is whistling past the graveyard.
I have no reason to doubt the numbers reported in the survey. However, much of the financial press and the independent analysts are expecting even deeper declines in the global economy and a recovery that is more than several years in the future.
For the US to recover, there must be more exports. This will be difficult because much of the manufacturing capabilities of the US have already been moved off-shore.