This week, the spotlight shines on the lodging sector within commercial real estate, and our guest expert is Mathew Crosswy, principal at Atlanta-based Stonehill Strategic Capital, where he is in charge of the company’s efforts in sourcing and underwriting new credit opportunities, while continuing to build and maintain existing relationships with investors and borrowers. Prior to heading Stonehill Strategic Capital, he was responsible for sourcing, negotiating, and financing hotel investment opportunities for Peachtree Hotel Group.
Q: What kind of a year has 2014 been for the hospitality sector within commercial real estate, and what factors shaped the year?
Mathew Crosswy: As a whole, 2014 has been a strong year for the hospitality industry. Underlying lodging fundamentals continue to improve with strong business, group and transient travel, resulting in Revenue Per Available Room (RevPAR) growth expected to exceed 8.0 percent for the year. RevPAR growth was fueled primarily by historically high levels of demand coupled with a strain in supply during the “Great Recession” and moderate supply growth during 2014. The long term average historically hovers around two percent. In 2014, it was slightly above 1 percent.
Occupancy growth was strong in the past few years, but in 2014, ADR growth finally came to the market.
Q: Looking ahead, what kind of a year will 2015 be for the hospitality sector? And what markets do you predict will enjoy the greatest activity in the hospitality sector in 2015?
Mathew Crosswy: Lodging fundaments are projected to remain strong in 2015 with RevPAR growth projections from 6 percent – 8 percent. The strong performance indices and projections are great, but this also is resulting in new equity flooding into the space.
A trend towards the end of 2014, which is likely to continue into 2015, is that trades are becoming more and more difficult to justify from both a cost per key basis and a cap rate perspective. In the third quarter of 2014, cap rates for all hotel trades averaged around 8 percent, down 28 bps from 2013, but most notable is the spread between the sectors: full service, down 58 basis points (bps); limited service, up 29 bps; major metros, down 74 bps; secondary markets, down 36 bps; and tertiary markets, up 13 bps. This trend illustrates equity chasing trophy assets, which competition will get so aggressive, the pricing trend will move into limited-service hotels in secondary and tertiary markets.
Q: What role will foreign investors play in the purchase and operation of major hospitality properties in 2015?
Mathew Crosswy: As evidenced by recent trades, foreign capital is chasing major metro trophy assets and safer havens for yield. This trend is likely to continue, but the growth in dollar valuation will play an interesting role in the longevity and the countries from which the foreign nationals participate.
The health of these countries and the concerted efforts to improve the economies through monetary policies and capital injections will be key, as well. EB-5 also continues to be a popular source of capital that is benefiting from a robust number of regional centers being formed and also sponsors finding deals. However, the huge influx of this capital has caused a constraint in the oversight and approvals making this an attractive source of capital, but one that requires patience.
Stonehill Strategic Capital is online at http://stonehillstrategiccapital.com.
Phil Hall has been (among other things) a United Nations-based radio journalist, the president of a public relations and marketing agency, a financial magazine editor, the author of six books and a horror movie actor. Also, as you will discover, he is not shy about stating his views.