As real estate fundamentals continue to improve, the global hotel investment continues to rise. The recent report by Ernst & Young indicates that global hospitality and leisure transactions increased 8 percent year-over-year through Q3 2014, showing that the industry continues to gain momentum even in the face of accelerating geopolitical instability, health and terrorism concerns. Last year it was predicted that a wave of new hotels will open, along with robust global development pipeline of approximately 1.3 million guestrooms being in place.
This year, foreign buyers are continuing to surpass the traditional gateway markets to secondary markets, such as Orlando. According to the report, investors from Canada, China, Malaysia, Japan, Singapore and the Middle East have chosen to deploy a large amount of capital in US hotels. In hospitality real estate’s current landscape, the report indicates that new players are also emerging. “In recent years, certain financial institutions and other alternative investors, which have been indirect real estate investors, are now looking to expand to new platforms, taking advantage of their base-level knowledge of real estate from their lending or other investment activities,” noted the report. These new players are diversifying the M&A space. The space is also significantly more competitive. “Within hospitality, new players are mainly competing for trophy assets in select gateway markets. However, seasoned industry players with a track record of success are still driving most activity in the hotel space.”
Onward into 2016, the market indicators point to robust transaction activity in the sector with the US expected to remain the leader in M&A activity as the third-party operator model continues to mature throughout other parts of the world, according to the report. For commercial real estate investors, there is significant opportunities to fuel growth through consolidation.
Let’s take a look at some demographics. The report indicated that over the past several years, the millennial generation has increasingly impacted the lodging industry, calling into question products and offerings that have for decades been industry mainstays. “Today’s emerging traveler, millennials and millennial-minded travelers, is more cost-conscious and experience-focused than ever before, whether traveling for business or leisure,” it was noted.
Today, the cost of development and land prices in metropolitan cities such as Miami and Orlando continue to rise. This leaves commercial real estate developers with options to turn to alternative lodging concepts and more unique opportunities to reduce costs while at the same time command strong demand. “With shorter development periods, smaller rooms and the ability to use nontraditional spaces, these concepts can have lower development costs than traditional full service hotels,” the report stated. Efficient use of spaces have already penetrated major markets, including South Beach in Miami. The report also indicated that many investors and lenders consider alternative lodging products as appealing only to a specialized consumer whose preferences will ultimately change with trends. “As demand for new lodging products and experiences continues to grow, hoteliers will need to balance satisfying this demand with investments in traditional products.”