New Year Update
Posted on February 28th, 2017 by Earle Wason
Here it is the day before the inauguration of President-elect Trump and my Real Estate Journal friends have asked for me to give a preview of the upcoming year. Maybe, if I were a real psychic, it would be easy but there are lot of unanswered questions as we enter the New Year. However, as I have been for the past 4 or 5 years, and correctly so, I remain optimistic for our industry.
Well operated hotels throughout New England enjoyed another very good year in 2016. Some of the seasonal resort hotels in the winter locations were negatively affected by the winter weather but the summer and foliage season was so strong that many caught or came close to the 2015 revenues. Already those properties are experiencing a much better winter season and all in the industry should see a very good 2017.
I think the hotel transitions market may not be on as strong a footing. I do believe this will not be due to the economy in general but a lot of things at play in the industry here in New England. Let me touch on some of the issues that will affect hotel sales in the coming year.
LACK OF GOOD QUALITY HOTELS FOR SALE:
The first view for me is the current lack of good available hotel properties for sale at a time where there is great buyer demand. This could be for a number of reasons among them: Hotel owners are getting very good returns on their investment, so no need to sell. Mr. Trump has indicated that he would like to reduce the Capital Gain tax so some potential sellers may be holding off to see if this comes to fruition. There are number of older hotels sold in the last boom that now have mortgage balances at or above the value of their properties, a little more on that later in this article.
As I most often do in my articles is call attention to older hotels and how fast they are becoming outdated/obsolete. As I mentioned above many older hotels are losing value and may be worth less than the mortgage. I think more of these will become available as the year goes on. This will probably not be of much interest to the larger regional hotel companies but could create some good opportunities. Just this week we saw a good example. A property operated as a Best Western sold about 5 years ago for just under $4,000,000. It lost its flag and was auctioned off last week, it sold for $975,000. I have similar examples of this and there will be more this year.
COST OF NEW CONSTRUCTION:
The cost for new construction is going through the roof but still new hotels will be built especially with the push for new brands. There are so many brands now that it is impossible to know them all. Hilton is now pushing its new Brand “Tru” and more Home2 Suites are under construction. Choice is really making a strong effort to grow the Ascend Brand as “a collection of one of a kind upscale hotels”, Hyatt now includes: “Centric” and Andaz” and the list goes on. All of which again will affect the older hotels.
The cost of construction will also have another effect on 2017. Many companies are now looking to find well-built 3 to 6 story hotels that can be purchased in the $60,000 to $70,000 a key range. The ideas is to put another $20,000 or more per room into the property and have a good quality property for much less than new construction. These opportunities will also allow the operator to monitor their room rates to below the new hotels room rates and thus compete very effectively.
Another hotel segment to watch in 2017 is the continued growth of boutique hotels, both through new construction and redevelopment. There are now some very good companies based in New England that are actively seeking opportunities and bring with them great business plans to improve or build properties with well-defined business strategies.
THE NEW YEAR:
I am really looking forward to the New Year; to see what it will bring and continue my company’s business model. We tend to be very creative in structuring hotel transactions that range greatly in value. Our model is to represent owners of hotels where the value can be justified by the income stream or by improving the product and operation so that it then can be justified by the income stream. We recently closed the sale of the Valley Inn in Waterville Valley NH. It took almost 8 months but the title was transferred just before the Christmas holidays. It took a lot of negotiation, creative thought and tenacity to get it done. Hotels sales, such as this, will continue in 2017 but many will be difficult and for us the more difficult the better.
Happy New Year and may it be a good one for everyone in the hotel business.
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